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By Daniel Gros
Published: May 4 2011 23:14 | Last updated: May 4 2011 23:14
Tuesday's Portuguese rescue deal is being sold as a way to buy time. The â?¬78bn ($116bn) package, agreed with the European Union and the International Monetary Fund, is welcomed because Portugal will gain a few more years to delay fiscal adjustment. But the victory will be short-lived, for fiscal problems alone are not what ails Portugal's economy.
The IMF's acronym is said to stand for "It's mainly fiscal". This maxim has certainly been applied by the IMF and the EU to Portugal, just as it was to the other struggling eurozone states. However, Portugal's problem is one of foreign debt. Its ratios of public debt and deficit to gross domestic product are similar to France's, yet France is not close to a fiscal crisis. This is because Portugal's crisis is born not of public borrowing, but the debt of its private sector, in particular banks.
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