Portugal Begins to Crumble

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Yesterday, Portugal's parliament rejected a new austerity plan that would have hopefully gotten the country back on track and helped it avoid becoming the third EU nation to ask for a bailout. After the rejection, Portugal Prime Minister Jose Socrates resigned, sending the government into limbo as the country waits for a new election.

What it means for Portugal
The political standoff only worsens an already difficult situation. Last week, after a bond sale and a credit rating cut, Portugal's borrowing costs rose, taking on an additional 0.3% from just two weeks ago and adding 3.3% from one year ago.

Today, EU officials will meet in Brussels to discuss a widening of the potential bailout package, where they're expected to settle on a $710 billion post-2013 bailout fund. This means there is plenty of money to help Portugal should it have to put out its hands to the EU/International Monetary Fund for help; the more important question is what it means for the rest of the EU, and in particular, for Spain.

Mounting concern for the Spanish
The general consensus is that in isolation, a Portuguese bailout wouldn't be catastrophic. However, it then puts the spotlight on Spain, the EU's fourth-largest economy. European Competition Commissioner Joaquin Almunia downplayed the threat to Spain, saying that "the evolution of (economic) indicators in Spain is clearly separate from other countries such as Portugal, Ireland, or Greece."

However, others see it quite differently. Moody's has recently downgraded the senior debt of 30 Spanish banks, which followed its earlier downgrade of the Spanish credit rating a few weeks ago. Fifteen of those banks were downgraded by two notches, while about five banks were cut by three or four notches.

Two of Spain's biggest banks, Santander (NYSE: STD  ) and BBVA (NYSE: BBVA  ) , were left untouched by Moody's. In fact, year to date, their share prices haven't done so badly either. Santander has shot up by 14% while BBVA is up 26%. This is even more impressive when compared to struggling banks in the EU such as the Bank of Ireland (NYSE: IRE  ) -- down 30% -- and Allied Irish Banks (NYSE: AIB  ) -- down more than 40%. Even the National Bank of Greece (NYSE: NBG  ) has managed a solid 16% gain so far in 2011.

The Foolish bottom line
The Portuguese government has cut its gross domestic product growth expectations from 0.2% to a contraction of 0.9%, and now that the country is in a mild political upheaval, we shouldn't expect things to get much better anytime soon. It will be interesting to see what happens in Brussels today and whether EU leadership can address the bigger concern -- how to handle continued banking weakness in Spain.

Interested in following any of these banks as they navigate their way through the crisis?

Jordan DiPietro owns shares of National Bank of Greece. The Fool owns shares of National Bank of Greece. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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