Tuesday, May 10, 2011

Finland, Portugal and the future of the euro

European Commissioner Olli Rehn warned Finland today that it would cause a 'Portuguese Lehman' if it refused to back emergency funds for Portugal. The term is a bit off, as Lehman was private company, but the message is on target.

Then, as now, an important financial player will go bust without further assistance. If it goes bust, the contagion to other markets will be fast and hard. Portugal can be allowed to fail as a state just as Lehman was allowed to fail as a bank. But does Europe want that?

In concrete terms, if Portugal fails, there may be serious consequences for Spain. It's not the only country that would be hurt, but it is the most vulnerable. And when financial markets smell blood, the sense of weakness can become a self-fulfilling prophesy.

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