Shawn Pogatchnik, Associated Press
DUBLIN — Throughout the deepening debt crisis, European Union leaders sought to portray Greece as a unique case in special need of aid. They were proved wrong when Ireland and Portugal required bailouts in 2011.
They're likely to be proved wrong again. And this time, the stakes are higher for the rest of the world.
Economists are confident that Portugal will follow Greece and seek a second bailout, and many expect Ireland to do the same. They agree that if both countries do need further funds in 2013, Europe can comfortably underwrite their cash needs.
The far greater risk to Europe's financial system would be if Spain or Italy — with their vastly larger economies and debt loads — are forced to take a bailout. At stake would be the very survival of the euro, the currency shared by 17 countries known as the eurozone.
Spain and Italy suffer many of the same kinds of problems that inspired creditors to flee Greece, Portugal and Ireland.
Italy's public debt level is not much better than Greece's and worse than Portugal's. Spain, like Ireland, faces a rising tide of business and household red ink tied to spectacular collapses in property prices since 2008 — and could find those crippling private losses transformed into public debt.
At the height of the debt crisis last winter, borrowing costs for Italy and Spain on bond markets hit highs that would have been unsustainable without a bailout.
New austerity-minded governments in Rome and Madrid have helped calm fears, but of far greater significance was the European Central Bank's decision to provide banks more than €1 trillion ($1.3 trillion) in bargain-basement loans. This unprecedented injection spurred banks to snap up battered government debt, driving up the bonds' value and driving Spanish and Italian borrowing costs down again.
Economists warn such relief is only temporary. The eurozone's weakest economies must convince investors they can repay their debts without special help.
Yet the economies of Spain, Italy, Portugal and Greece are forecast to shrink this year, while Ireland alone might eke out a small gain. All are expected to cut spending and raise taxes — sucking money out of their cash-strapped economies.
"Portugal is the next great litmus test for the eurozone," said Constantin Gurdgiev, an economist who teaches finance at Trinity College Dublin. "We know it cannot avoid a second bailout. And Portugal offers a sneak preview of what is going to happen in Spain."
To maintain investors' confidence in the euro, economists say Europe must build a financial "firewall" exceeding €1 trillion, a figure big enough to provide credible aid in the event that Spain and Italy are priced out of the bond markets.
Europe's future rescue fund due to come into force in July, the European Stability Mechanism, as envisioned barely cracks €500 billion — and some €200 billion of that is already earmarked for use in the existing Greek, Irish and Portuguese bailouts. Much of what's left could be hoovered up by a second bailout for Portugal and Ireland and a further bailout for Greece.
European finance ministers meet next week in Copenhagen to discuss plans to raise the firewall by up to another €240 billion, a move being resisted by Germany. But even a firewall claiming a headline figure of €740 billion seems too small to reassure the markets about Spain and Italy, whose government debt stands at a combined €2.6 trillion ($3.4 trillion).
"If we had a rescue umbrella over the whole eurozone for Italy and Spain, which is clearly not the case now, this would reduce the risks involved," said Ulrike Rondorf, a Commerzbank economist in Frankfurt.
Below is a look at the European countries — other than Greece — that economists are watching closely for signs of distress.
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