Telegraph: Cool, calm and collected in the face of disaster shows markets' madness

Europe has stumbled into its next crisis but markets on Thursday remained calm, sanguine even, as the eurozone express continued to plough off the tracks. Only the peculiar autism of finance could produce such an odd reaction.

Portugal is taking on another €75bn of debt, albeit at cheaper rates than those charged by conventional lenders who have fled the scene, to tide itself over in the short term. CREDIT: Photo: Bloomberg

Endless reports and pieces of analysis on Thursday told us that Portugal's cry for help was entirely expected and the European Central Bank's (ECB) interest rate rise was long awaited. Frankly, they said, there's not a lot new to worry about. The financial world stared on blankly, unmoved by events.

But this muted response, far from being reassuring, is more evidence of the disconnect between the numbers world
and the real world. We've had bail-outs in Greece, Ireland and now Portugal, while the ECB has chosen this moment to begin its war against inflation, Germany's great fear.

The nature of today's eurozone crisis has the feel of the creaking European Monetary System in the early 1990s, the Asian financial crisis later that decade and the rolling credit crisis which took from the summer of 2007 until the October of 2008 before Lehman Brothers eventually blew up and Royal Bank of Scotland and Lloyds Banking Group needed rescuing. The violent aftershocks continue.

There is a momentum behind events on the Continent which Thursday's developments didn't cauterise. Far from it. If anything they exacerbated the underlying problems which aren't financial but political – hence the markets' lack of reaction. If the challenge faced by Portugal was a conventional debt crisis then markets would be right to be sanguine. Europe's bail-out fund will ride to the rescue with terms agreed and contagion avoided.

But, as with Greece and Ireland, this is not a conventional debt crisis. At its heart, this is a crisis of European governance and the structure of the European Monetary Union, something markets can't really compute.

We're not drawing to an end of the issue, we're just at the beginning.

Portugal is taking on another €75bn of debt, albeit at cheaper rates than those charged by conventional lenders who have fled the scene, to tide itself over in the short term. The bail-out will come with political conditions of a distinctly Germanic flavour attached.

Portugal has a caretaker government with elections looming soon. What chance does this fragile political system have of implementing the sort of draconian austerity measures that will be required under the bailout to get Portugal's public finances under control while discovering some new engine of growth? I'd say the chances are slim at best.

Here in the UK we know only too well what fiscal consolidation means. But we still maintain our economic sovereignty – just.

Portugal, Ireland and Greece do not, a fact that won't be lost on the assorted demonstrators and voters thronging the streets of Lisbon, Dublin and Athens in the weeks and months to come.

Such political instability makes the possibility of one or all of the countries defaulting (restructuring as it is known in the anaesthetised parlance of markets) all the more likely.

There will be a pause for breath but attention will soon turn to Spain. Its exposure to Portuguese banks will be of increasing concern. But so, too, will its own banks, particularly its savings banks, or cajas. For the markets to remain calm about Spain, Madrid needs to come clean on exactly how big its own bail-out of these deeply troubled institutions is going to be - €20bn? €50bn? Who knows? But, until there's clarity, Spain remains the next domino.

An even bigger uncertainty is just how far Germany will go in standing behind this pack of cards. It has its own domestic political problems, as Angela Merkel has just discovered in Baden-Wuerttemberg. And all the time we have the backdrop of a central bank aggressively tackling inflation with rising interest rates.

This, and the support it gives to the euro, makes regaining competitiveness all the harder for Portugal and its bailed-out partners. Maybe it's just me, but I think the markets may have it a tad wrong.

£3.6 trillion debt has noughts to worry us

IF proof were needed that the UK must remain on course with its own fiscal consolidation, it came on Thursday from Brooks Newmark, a government whip.

He's updated the country's true debt position, which includes our off balance sheet liabilities, such as those that came via ownership of the Royal Bank of Scotland, the blank cheque of public pensions and our PFI bills. It's £3.6 trillion.

Sell the bank stakes well and that falls by £1.3 trillion.

Let's hope the Independent Commission on Banking doesn't do too much damage to their valuations.