The second bailout of Greece may not be the euro zone's last sovereign rescue mission. While the world's attention is focused on Athens, at the other end of the Mediterranean, Portugal is quietly unravelling.
Portugal received a €78-billion ($103-billion) bailout last spring. Since then, its credit rating has been cut to junk, its recession has deepened, its jobless rate has soared and is bonds trade at double-digit crisis levels. Only last week, German Finance Minister Wolfgang Schaeuble promised his Portuguese counterpart Vitor Gaspar that international lenders would be willing to stump up again.
Caught by a camera crew, Mr. Schaeuble said: "If there would be a necessity for an adjustment of the Portugal [program] we would be ready to do that."
Some economists and strategists think Portugal and Ireland, the third bailed-out euro zone country, are emboldened by the fresh Greek rescue plan and its apparently generous financial terms. Others think they would be foolish to accept more financial assistance, given the extreme bailout conditions placed on Greece.
The Greek package will deliver €130-billion in new loans from the European Union and the International Monetary Fund (raising the total to €240-billion in less than two years). But in an effort to make Greece's crushing debt load sustainable, the lenders agreed to reduce the loans' interest rate by 0.5 percentage points over the next five years, and 1.5 percentage points in later years. The trimmed interest cost is expected to save the Greek treasury €1.4-billion and drop the national debt level by 2.8 percentage points by 2020.
On top of the discounted interest rate, Greece is close to completing a debt swap with private investors, mostly banks, that will see them lose 53.5 per cent of the face value of their Greek sovereign bonds, up from 50 per cent in the previous proposal. The effort will cut Greece's national debt load by €107-billion, equivalent to one-third of the total debt.
The central banks will help too. Until the end of the decade, the national central banks will transfer all income generated by the bonds to Greece. The European Central Bank has agreed to deliver the profits of its €40-billion Greek bond portfolio to member states.
The bailout packages of Portugal and Ireland lack all of these features. "That was the risk of a 'successful' Greek deal," said strategist Marshall Auerback, director of Toronto's Pinetree Capital. "Portugal and Ireland will ask for a similar deal. Why wouldn't they?"
While it is not known whether Portugal has asked for equal treatment, Ireland was hunting for concessions even before Greece and the troika – the European Commission, the IMF and the ECB – confirmed Greece's second bailout after a 14-hour negotiating session that ended early Tuesday morning.
Ireland has been lobbying the ECB to cut the cost to the government of bailing out its banks, whose collapse triggered the Irish rescue.
"If the ECB are prepared to make this kind of concession to Greece, it would encourage me to think that they might be ready to make concessions on the promissory note to Ireland," Irish Finance Minister Michael Noonan told state broadcaster RTE earlier this month.
The troika, however, has said that Greece's special treatment – notably the bond "haircut" – is a one-off event that was necessary to keep Greece from defaulting and potentially shredding the 17-country euro zone. Offering the same terms to Portugal and Ireland is not on the table, if only for the sake of the stability of the bond market. But that will not keep them from asking for lower debt and financing costs.
Given what Greece had to promise in return for the bailout and the debt-crunching exercise, Portugal and Ireland might think twice about seeking extra international financial assistance.
Greece has committed to the deepest austerity program since the euro was launched a dozen years ago. The aggressive tax hikes and, soon, spending cuts are deepening the recession, which is about to enter its fifth year. Youth unemployment is approaching 50 per cent. The cutbacks are triggering social chaos. Dozens of buildings in Athens were torched in the Feb. 12 anti-austerity riots. Economist Jennifer McKeown of London's Capital Economics said in a note published Tuesday that "with the recession thwarting debt reduction efforts and public outrage growing, we still see Greece leaving the euro zone before the year is out."
Greece has essentially lost all economic and financial sovereignty. In exchange for the new bailout, the troika demanded the right for "enhanced and permanent presence on the ground in Greece" to monitor Greece's budget and austerity programs. It also insisted that Athens pass legislation that would guarantee that debt servicing would get priority over other government spending.
Mr. Schaeuble, the German Finance Minister, went so far as to ask Greece to postpone its spring election as a condition for further assistance. His fear, apparently, is that any new government would dilute the tough austerity and reform measures.
Mr. Auerback said the shock austerity and sovereignty-killing treatment delivered by the troika to Greece has a hidden agenda, which is to encourage the weak countries to fix their own problems "so that there's no risk that they will follow down the route of asking for debt relief."