25th Sep 2022

EU sovereign-debt monster approaches Iberian shores

  • The main square in Valladolid, Spain (Photo: marcp_dmoz)

The sovereign debt crisis behemoth that had shaken Europe to its core by the end of Monday appeared to be moving on southward to demand its latest victims as investors appeared unconvinced that the Irish bail-out plan was working. Dublin also announced it would hold elections early in the new year.

Portuguese, Spanish and EU leaders, alarmed at the seemingly unquenchable vengeance of this marketplace leviathan, insisted that the two Iberian nations were very far from having to follow Ireland and Greece in asking for bail-outs.

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The premium on Spanish bonds over their German counterparts, viewed as the ne plus ultra of safety, climbed to 2.1 percentage points, up from 2.02 points on Friday, before Ireland had officially applied for the EU-IMF financial rescue. Separately, premiums on Portuguese debt rose to 4.6 percent. European stock markets slid, with Spain's Ibex down 2.7 percent, Ireland off 1.4 percent, and Italy closing at 1.2 percent.

Portuguese Prime Minister Jose Socrates insisted that Lisbon needed no help from any eurozone bail-out scheme, saying there was "no connection" between the Irish situation and Portugal's own debt problems.

"Portugal doesn't need anyone's help and will solve its own problems," he said, stressing that his parliament, due to pass further austerity measures this week, and will slash its budget deficit from 9.3 percent of GDP to 7.3 percent this year, and then in 2011 to 4.6 percent giving the country a "lower deficit than France, not to mention Greece, Ireland, the UK, the US or Japan."

But market commentators, worried that state deficit figures jumped two percent in the first nine months of this year, appeared unconvinced. Meanwhile, the country's two union centrals were readying a general strike against austerity planned for Wednesday.

Not helping matters, on the weekend, centre-right opposition leader Peder Passos Coelho accused the government of fudging the numbers when it came to the state of public debt, saying that the true number is 122 percent of GDP, not 80 percent as attested.

Spanish finance minister Elena Salgado for her part, drilled by a radio reporter on whether Madrid will ultimately need help too, replied: "Absolutely not...Spain is doing everything it has promised to do, with tangible results."

EU economics chief Olli Rehn sought to buttress the the standing of Portugal insisting on the "very different" situation between Lisbon and Dublin, while the head of the eurozone, Luxemburgish Prime Minister Jean-Claude Juncker described the market vigilantism against Portugal and Spain as "not justified".

Railing against the state of affairs, Mr Rehn told MEPs on Monday: "Any talk of deconstruction of the European project is irresponsible. All member states would have been in a much more difficult situation without the European Union and its political shield."

"'The euro is, and continues to be, the corner stone of the European Union. It is not only a technical monetary arrangement, but it is indeed the core political project of the European Union."

"Therefore it is indeed essential that we will do our best, do our utmost, to protect and reinforce this European construct."

In Ireland, leader Brian Cowen attempted to quell growing rage at his handling of the economy after his Green coalition partners called for elections in January and backbenchers from his own Fianna Fail party began to call on him to resign, announcing a general election early in the new year following passage of a draconian EU-IMF troika-imposed four-year budget.

Irish media however are reporting that opposition leaders from Fine Gael and Labour - expected to form a coalition following any vote - are demanding an election ahead of the passing of the budget.

On Monday, the IMF demanded in a position paper that Dublin slash welfare payments and cut the minimum wage. Separately, further details of the four-year austerity budget are trickling out ahead of its presentation, expected sometime in the next 24 hours, with efforts to ease the costs to business of electricity, broadband, legal fees and rubbish collection.

Germany was also insisting that conditions on any loan also include a raising of Ireland's ultra-low 12.5 percent corporation tax.

"The German government will not be making proposals" government spokesman Steffen Seibert told reporters in Berlin.

"But it is clear that corporation tax should be one point among others when one considers how to increase the 'receipts' part of the budget," he added.

Commissioner Rehn on Monday also suggested, speaking to Ireland's RTE broadcaster that the bail-out "is likely unfortunately to imply tax increases."


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