Q: How did Portugal get into this position?
A: Years of sluggish growth led Portuguese governments to increase borrowing to try to stimulate the economy. Low interest rates caused by the introduction of the euro also allowed businesses and households to get into debt. Eventually, Portugal could not afford that debt.
During six years in power, José Sócrates, now the interim Portuguese Prime Minister, avoided structural economic reforms for political reasons. Interest costs rose on Portuguese government debt and investors’ trust evaporated. Finally, Lisbon had no option but to ask for a bailout.
Q: Why did Portugal wait so long to ask for help?
A: Mr Sócrates did not want to be seen to ask for help because he feared that it could cost him the next general election. He believed that austerity cuts were enough but they came too late.
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The opposition centre-right Social Democrats also wanted to avoid asking for a financial rescue package, fearing that it would cost them politically.
The EU arguably played along with the delay because it gave Spain more time to get its own house in order. This reduced the risk that the markets would begin to fret about Spain once a rescue of Portugal was announced.
Q: What will Britain have to pay?
A: Forecasts have put the possible liability for Britain stemming from rescue loans to Portugal at €4.5 billion (£3.96 billion), but the final figure could be less than this depending on the terms of the deal.
The UK’s main exposure comes from its participation in the European Union’s rescue mechanism, and it is also involved as a shareholder in the International Monetary Fund. But Britain would have to pay out only if Portugal defaults on the loan and no money could be recovered; this is thought to be highly unlikely.
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Q: What is effect on Portugal of a European Central Bank interest rate rise?
A: It would add to the economic headwinds facing Portugal by raising the cost of borrowing for the country. A large portion of Portuguese mortgages are on floating rates, so homeowners could be clobbered by a rate increase. But the ECB appears to have decided that the risk of higher inflation outweighs the damage that a rate increase will do to countries on the periphery.
Q: Is Spain next?
A: Spain looks more resilient today than it did a few months ago after executing tough reforms to bolster its economy, but it is still the biggest eurozone worry area now that Portugal has sought refuge in the hands of its EU partners.
In the short term many believe that an EU loan to Lisbon will further ease pressure on Spain, whose financial interests in Portugal equal €75 billion, or 7 per cent of Spanish GDP. But market attention will now focus on Spain as traders assess whether it is on track in its attempts to stimulate growth and bolster its shaky banking system.
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Three factors give rise for concern. An interest rate rise would hit Spain’s battered consumers and damage prospects for growth. Also, central and regional government debt reduction goals for this year likely would go unmet. Spain’s savings banks, laden with debt from the collapse of the building boom, may struggle to find private investors and be forced to accept government cash.