Portugal could default, says LSR’s Stein
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Portugal may choose to bypass an international bailout and move directly to default, Gabriel Stein, a research director at Lombard Street Research (LSR), argues.
Last night the Portuguese prime minister José Sócrates resigned after failing to pass new government spending and deficit cuts through parliament, as its costs of borrowing remain at what the government describes as danger-zone levels.
The resignation has led to widespread expectations that the country will seek a rescue from the European Union (EU) and the International Monetary Fund.
But this is not the only course of action that Portugal may be considering, according to Stein, who asks why the country’s parliament failed to support Sócrates’s new austerity package.
If it was because the opposition is against further tightening on principle, it will make the country less like to apply for a bailout and the “onerous” and “humiliating” conditions that will come with it, he claims.
“On this basis, it is perhaps not a Portuguese bailout, but rather a default, that has been brought forward,” Stein suggests.
The director adds that the country will remain in a “period of uncertainty” until a new government is decided in May, after which a bailout application may well be made.
However, Stein says the new administration may find it difficult to construct a fiscal package that satisfies other EU countries and claims it could be easier to renegotiate the whole debt, leading to “a default which could be blamed on the previous government”.
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