Time matters

Euro zone: After a short break, the players are back at the table, and the game can resume. Next up, Portugal. Financial markets want to know whether the euro zone will bail out its latest financially-challenged member. Euro zone governments, on the other side of the table, are reluctant to show their hands while the player in the spotlight, the Portuguese government, says it doesn’t need help. At least for now.

This is an all-too-familiar story. It follows the same pattern seen last year in Greece and Ireland. This time, however, it looks like Europe’s largest governments want to avoid the mess, complete with leaks galore and last-minute dramatic negotiations, which tarred the previous two cases. This is wise, because there is something more important at stake than Portugal. In France, Germany and at the European Central Bank, Lisbon is seen as the last line of defence against a larger, and potentially systemic, crisis: A bailout of Spain.

Taking care of Portugal now, with a bailout that could reach euro60-80 billion for the next three years, would be well within the means of the European Financial Stability Facility. It would quash the Iberian crisis by showing resolve, argue those in favour of a swift pre-emptive strike.

Yields on Portugal’s 10-year bonds hover around the seven per cent level the Portuguese government itself has described as unsustainable. That said, Lisbon can argue that, for the time being at least, it can fund itself at rates slightly below those that the EFSF would demand for three-year loans. It also hopes that growth may be slightly better than previously thought, and that it is on track to meet its deficit-reduction targets.

But the current yields are a reflection of the European Central Bank’s intervention on the Portuguese sovereign debt market in recent days, and can’t be taken as a sign of true market pricing.

Furthermore the ECB is making it clearer by the day that it is acting reluctantly while pressing governments to be more decisive. Meanwhile Portugal’s political situation - it is led by a minority government that has to beg for opposition support on its fiscal plans - makes it difficult for its government to brave the stigma attached to asking for EU and IMF aid.

Euro zone leaders must also contend with a difficult political situation in Belgium, which has been without a government for months. Markets are beginning to notice. Interest rate spreads on its debt over 10-year German bunds have shot up 40 basis points to 1.4 percent since the beginning of the year. Belgium has one of the EU’s largest public debt numbers, at more than 96 percent of GDP.

With yields still well within the comfort zone, it is unlikely that Belgium will need a bailout soon. Still, you know a crisis is serious when a monarch gets involved - and Belgium’s king is urging the country’s caretaker government to proceed with fiscal restraint and spending cuts.

At the very least, the new Belgian front adds to the sense of emergency that is gripping euro zone leaders. It also emphasises the wisdom of dealing with a potential crisis promptly, in the hope that Spain can be protected. If this means euro zone authorities exerting heavy-handed pressure on reluctant governments, so be it. In the euro zone, the days of absolute fiscal sovereignty are long past.