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Sovereign debt: Portugal needs a new compass

The country faces more than a liquidity crisis; a fiscal restructuring of the economy is required.

When borrowing one-year money from the market costs more than a five-year loan from the EU’s bailout fund, you know the game is over. Portugal’s fate was sealed long ago, well before the resignation of José Sócrates as prime minister on March 23.

Although the government managed to get away a series of bond auctions at the beginning of the year, they were at penal rates. The auction on April 6, in which Portugal raised €1 billion and was forced to pay a yield of 5.9% for one-year bills and 5.11% for six-month money, was the final straw.

Portugal will now follow the path trodden by Ireland and Greece in seeking rescue loans from the EU and IMF. Analysts think it will need about €80 billion. Whether or not the bailout will do Portugal any lasting good is a moot point. What the country needs, like Ireland and Greece, is a restructuring of its debts to make them sustainable. Portugal’s problem is one of solvency not liquidity.

Although Portugal will be a byword for the eurozone crisis for years to come, the single currency has magnified the country’s travails rather than been a cause of them.

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