11 April 2013
Who’s next in line in the eurozone crisis?
Portugal and Slovenia are the prime candidates
Both Portugal and Slovenia could need external assistance of somesort.
Domestic demand, government spending and investmentare contracting sharply, leaving the country heavily reliant onuncertain export growth to drive the economy.
By cutting wages and costs at home (internal devaluation),Portugal has in recent years improved its level of competitiveness in the eurozone relative to Germany.However, this trend actually started to reverse sharply in 2012, meaning that thedivergence between countries such as Portugal and Germany has begun growingagain
exactly the sort of imbalance the eurozone is seeking to close.
In its austerity efforts, Portugal is now coming up against serious political andconstitutional limits. For the second time, the
court has ruledagainst public sector wage cuts
a key plank in the country’s EU
while the previous political consensus in the parliament for austerity hasevaporated.
In combination, it will be increasingly difficult for Portugal to sell austerity at homeand consequently to negotiate its bailout terms with creditor countries abroad.
Portugal may well need some further financial assistance before long. It is unlikely to
take the form of a full second bailout, but could involve use of the ECB’s OMT,
assuming Portugal can return to the markets fully beforehand (even briefly).
Slovenia is not Cyprus
in fact it is much more like Spain. Its banks are significantlyundercapitalised with toxic loans now standing at 18% of GDP. Banks only haveprovisions to cover less than half the potential losses resulting from these loans.
At the same time, a heavily indebted private sector is now desperately trying to getdebt off its books, which alongside continued austerity and lack of investment, havecaused growth to plummet.
Though a full bailout is unlikely, the country could soon need an EU rescue package
worth between €1 billion and €4 billion (between 3% and 11% of GDP) to helprestructure the country’s bust and mismanaged banks.
Such a plan is likely to include losses for shareholder (bail-ins) but, unlike in Cyprus,it may not hit large (uninsured) depositors and there will be no attempt whatsoever attaxing smaller (insured) depositors.The troubles in Cyprus have set off a new examination of the health of the eurozone, with aparticular focus on which country might be next in line for a bailout and the extent to whichshareholders and depositors will take losses when banks fail (bail-ins). Much of the attentionhas settled on two countries. Portugal, which has been propelled back into the headlines,with the co
constitutional court recently ruling against some of the government
-mandated budget cuts. Secondly, Slovenia, which is facing a massive banking crisis, in turnproviding
another potential testing ground for the eurozone’s vaguely defined ‘bail
Below we provide a quick rundown of the key points to watch in each country.