Portugal bailout on track except for collapsing economy

Reuters reports that according to the EU and IMF everything is on track with the Portugal bailout with the exception of its collapsing economy.

To anyone who isn't an adherent to pursuing the Japanese Model for handling a bank solvency led financial crisis and protecting bank book capital levels and banker bonuses at all costs, an economy that is shrinking uncontrollably would be a problem.

Fortunately, both the EU and IMF officials are adherents to pursuing the Japanese Model and therefore they don't see it as a problem.

For the rest of us, the collapse of Portugal's economy is a problem (but then again, so is the collapse of the Greek economy).

This economic collapse was also completely predictable as under the Japanese Model the economy of Portugal is not large enough to support the burden of the excess debt in the financial system that has been placed on it.

Your humble blogger is left to wonder if we are going to have to watch the collapse of both the Spanish and French economies under the Japanese Model before the EU and IMF stops pursuing the Japanese Model and adopts the Swedish Model.

Under the Swedish Model, banks are required to recognize upfront their losses on the excess debt in the financial system.  This preserves the real economy in places like Greece, Portugal, Spain and France as well as the social contract that exists in these countries.

Portugal's EU and IMF lenders gave Portugal thumbs up for the next tranche of their bailout funds on Monday, but warned of significant risks at home and abroad to the recession-hit, debt-laden country. 

"The program is broadly on track, despite stronger headwinds," the European Commission, European Central Bank and International Monetary Fund said in a joint statement. 

"Rising unemployment, lower incomes, and uncertainty are weighing on confidence, while the recession in the euro area is beginning to bear on export dynamics,"... 

"While downside risks to growth are significant, the program's macroeconomic framework remains appropriate." 

EU Economic and Monetary Affairs Commissioner Olli Rehn also said that "confidence in Portugal's prospects continues to grow, both among its institutional partners and market participants. This bodes well for Portugal's full return to market financing."

Maybe I missed something, but who would lend money to a country that cannot repay the loan because its economy is shrinking?