Portugal requests bailout. Will Europe's debt crisis stop there?

In a critical step in Europe’s struggle to end its debt crisis, Portugal formalized its bailout request and the European Central Bank raised its interest rates a notch on Thursday.

Portugal needs cash urgently, and with nowhere else to turn, it finally requested an embarrassing but unavoidable financial bailout from its European peers and from the International Monetary Fund.

The terms of the bailout and the sum, which analysts expect will amount to between 75 billion and 90 billion euros ($107 billion and $130 billion), still need to be negotiated in the upcoming weeks, but the money will likely arrive before the June snap general elections triggered by the resignation of Prime Minister José Sócrates late last month.

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More important, analysts say, it will come just in time for the government to pay back pending debts that expire in June. Without the bailout, the juncture would have threatened to drain cash reserves, considering the premium the market demands for Portuguese debt.

Separately, the ECB also raised interest rates across the eurozone from 1 percent to 1.25 percent in an effort to curb inflation, a move which some believe comes too soon because it could slow down a still laggard recovery.

Both decisions were long expected and were well received by the market and analysts. The debt crisis is likely to stop with Portugal. Spain, which at one point many thought would be the next candidate for a bailout, has successfully tamed those fears.

It’s the end of contagion, said Gilles Moec, the London-based senior economist of Deutsche Bank. “If you look at the way the market reacted to the crisis, it attacks selectively the countries with fiscal unbalances, but the core European countries haven’t been affected. There is no reason to be concerned about what’s happening in the peripheral economies.”

Portugal is the third European Union country to request a bailout. Ireland received an 80 billion euro loan (about $114 billion) and Greece a 110 billion euro loan (about $157 billion).

Mr. Moec discounted that Spain could be next. “There’s still uncertainty, but at least there’s a plan and a scheme. It’s a country that can afford to inject quite a lot of cash into banks while maintaining its public debts. I don’t think it’s the case of Portugal.”

Indeed, without the bailout, Portugal would have had to raise about 8 billion euros ($11.5 billion) by June and investors would likely no longer have been willing to invest in Portugal, Moec said. This week, Portugal had to offer sky-high rates to secure about 1 billion euros ($1.4 billion).

“Everyone knows how I deplore that this decision became inevitable,” Portuguese caretaker Prime Minister Socrates said late Wednesday when he announced the request was forthcoming.

The conditions of the loan will also be critical to the negotiation. The loan, which is likely to be between two and three percentage points below what the market is demanding for 10-year debt, will be tied to austerity measures. The Portuguese parliament last month voted against Mr. Socrates’s proposed austerity measures, which were intended to avert a request for a bailout. This time around, the main opposition party has already supported the EU-IMF request.

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