Restructuring likely Judging from market pricing of Portugal’s debt, it’s increasingly likely that this emergency lending will be accompanied by some type of debt restructuring after 2013. This would be enabled by the wider set of policy options favored by Germany.

Whether this time line materializes will depend not only on Portugal, but also on what happens elsewhere in Europe.

Specifically, will Portugal’s bailout be followed by a further migration of the debt crisis in the euro zone? Or will Portugal mark the phase when truly differentiated outcomes are sustained? The fear is that Portugal’s bailout is yet another indication that Europe’s peripheral debt crisis will ravage Italy and Spain next. This would be consequential for a lot more than just these two countries.

Italy and Spain would overwhelm the euro zone’s rescue mechanisms, thus transforming a peripheral crisis into a region-wide debacle.

Shift in focus Fortunately, the probability of this happening is declining as more European banks – including Germany’s Commerzbank and Italy’s Intesa last week – succeed in raising additional private capital.

If this trend continues, as I expect it to, look for the EU, ECB and IMF to change their approach to helping the three countries being bailed out. The focus will shift away from liquidity and on to solvency well before 2013.

he strategy has shifted even more of the burden to already stressed taxpayers and users of public services. It has further undermined the outlook for sustainable economic growth and employment creation, aggravating social tensions.