‘Two Down, Two to Go’ on Europe Bailouts, Standard’s Lyons Says

Spain is likely to follow Portugal in needing a European Union rescue as both countries struggle to reduce their budget deficits, said Gerard Lyons, chief economist at Standard Chartered Bank.

“Two down, two to go is how I see it,” Lyons told Tom Keene on Bloomberg Television’s “Surveillance Midday” today. “Greece and Ireland are down” and Portugal and Spain “need to get help. In Spain youth unemployment is sky-high, the economy is going to be weak; there is no easy way out.”

Portugal moved closer to needing a bailout after Prime Minister Jose Socrates’s offer to resign left his government in limbo on the eve of today’s EU summit to address the region’s debt crisis. Two-year Portuguese bond yields reached the highest since 1999.

Lyons said there is “a need to differentiate in Europe” as the “core economies in Europe are improving” while the “periphery stays weak.”

At the same time the bloc faces a political crisis as “Germans want the periphery to start behaving like Germany, which is not going to happen,” Lyons said. Also, the “Germans want the European Central Bank to start setting interest rates to suit the Germans and not to suit the Greeks.”

While the ECB has “done a fundamentally great job,” the “root problem is that one size doesn’t fit all,” Lyons said.

ECB policy makers have signaled that they may raise the benchmark interest rate, which has stayed at a record low of 1 percent for almost two years, at their next policy meeting in April to quell faster inflation.

“If interest rates stay low, inflationary pressures build in Germany and they have angst,” Lyons said. “If interest rates go up it hits the periphery really hard.”

To contact the reporters on this story: Gabi Thesing in London at gthesing@bloomberg.net; Tom Keene in New York at tkeene@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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