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Financial Planning > College Planning > Student Loan Debt

PIMCO’s El-Erian: Portugal Actions Represent ‘New Phase’ in European Debt Crisis

By John Sullivan

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Portugal’s decision to follow Greece and Ireland in seeking a European Union-led bailout may mark a watershed in the region’s debt crisis, according to PIMCO chief Mohamed El-Erian.

Instead of a falling domino that threatens to topple countries higher up the credit-quality ladder, the latest aid request will likely speed up the debt restructuring of the three countries in Europe’s intensive-care unit, he writes Friday in a Bloomberg opinion piece.

el-erian“Portugal’s need for emergency assistance became inevitable last month once its parliament rejected the government’s plans for yet another round of austerity," El-Erian (left) writes. “Former Prime Minister Jose Socrates’s resistance to seek a bailout became untenable in the face of credit-rating downgrades, deterioration in market spreads and access, and the added balance-sheet strains on Portuguese banks.”

With help coming from the European Central Bank, El-Erian writes, Portugal will now access emergency funds from other governmental sources to meet its debt obligations and to reduce the probability of a banking crisis.

“While Portugal is the third euro-zone country to go down this road in less than a year, the next phase will likely play out differently," El-Erian wrote. "Portugal is negotiating for a bailout in the run-up to its June elections. As such, it will find it hard to provide the policy commitments deemed critical for the type of EU and International Monetary Fund support keeping Greece and Ireland afloat,”

As El-Erian notes, transitional mechanisms will be needed to bridge to a new government that’s able and willing to commit to a credible multiyear reform program. Look for the ECB and EU to carry an even larger burden in the next few weeks, with the IMF getting involved at a later stage, he writes.

“Judging from market pricing of Portugal’s debt, it’s increasingly likely that this emergency lending will be accompanied by some type of debt restructuring after 2013. This would be enabled by the wider set of policy options favored by Germany.”

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