And the Spanish economy minister tries to hold back the waves
Portugal’s caretaker prime minister, José Sócrates, announced last week that he had asked the EU to bail out Portugal. In a televised address he said:
I want to inform the Portuguese people that the government decided today to ask . . . for financial help to ensure financing for our country, for our financial system and for our economy. This is an especially grave moment for our country.
The exact details of the bail-out are still unclear, but Portugal would need between €70 and €90 billion to cover its funding needs for up to three years. The response by financial markets to the announcement has been fairly muted, as most investors accepted a bail-out as inevitable and had already priced it into their investment decisions.
Portugal’s troubles have also firmly shifted the spotlight onto Spain, given the links between the two economies. Spain is too big to fail, and too big to be saved. The possibility of an attack on Spanish debt, therefore, would actually pose a threat to the euro as a whole.
Estimates place the potential cost of a Spanish bail-out at €470 billion. Elena Salgado, the Spanish Minister of the Economy and Finance, said that the risk of contagion
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… is absolutely ruled out . . . It has been some time since the markets have known that our economy is much more competitive.
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