Well here we are again. Not that it wasn’t obvious, I have previously talked about why, and also about the Greek mess, this is no different.
Europe’s wealthy countries looked to Portugal to resolve the year-old euro debt crisis by coming up with “sustainable” deficit cuts to pave the way to an 80 billion-euro ($116 billion) bailout.
Confident that Portugal will be the last aid seeker, German Finance Minister Wolfgang Schaeuble pushed the feuding political parties in Lisbon to unite behind an austerity package in the thick of an election campaign.
“It’s up to Portugal to decide,” Schaeuble told reporters today at a meeting of European finance officials in Godollo, Hungary. Portugal “has to deliver sustainable measures for reducing the deficit.”
Bond markets reflected optimism that Spain will escape the turmoil, bringing Europe closer to extinguishing the crisis that started with Greece and Ireland last year and threatened the survival of the euro, postwar Europe’s signal economic achievement.
Finance ministers agreed yesterday to send European Commission, European Central Bank and International Monetary Fund officials to Lisbon next week to start negotiations over the package, with the goal of wrapping it up on May 16, three weeks before Portugal’s June 5 election.
Portugal’s bond yields surged to euro-era highs after the opposition party balked on March 23 at a program of additional savings of 4.5 percent of gross domestic product over three years, leading Prime Minister Jose Socrates to step down and prompting downgrades in the country’s credit rating.
I am not confident Spain will miss anything. When Greece was in the same boat we were all being told that Portugal wasn’t Greece.
Portugal is a “totally different situation” than Greece, Ricardo Salgado, chairman of Espirito Santo Financial Group [ESFG], a financial services holding company that does business primarily in Portugal, told CNBC on Tuesday.
“Greece is much more oriented to the Eastern part of Europe, to the Balkans,” said Salgado, who also serves as director at NYSE Euronext. “Portugal is in the crossroads of the southern emerging countries.”
While Portugal is exposed to new markets like Morocco, Algeria and Tunisia, said Salgado, the Iberian country also enjoys close economic relationships with Brazil and Sub-Saharan Africa.
“Our exporters move rapidly into those regions, and today, we have an increase in exports of over 14 percent,” he said. “We are exporting very well— engineering services, construction service, software service— and goods from machinery and agriculture.”
Unlike Greece, Portugal plans to allocate billions of dollars into public projects including a national airport and high-speed rail linking it to Spain. And, at 77 percent of GDP, Portugal’s debt is less than many other European countries, said Salgado.
I know that everyone thinks they are different, we have the same issue in Australia with the credit driven housing market, but the fundamental facts are they are not. Here is the private debt to GDP chart for the EMU periphary
and here is the balance of trade charts for both Greece and Portugal.
These countries suffer from the same issues. They have allowed themselves to take on too much debt caused by a lack of monetary control by being a member of the EMU and a lack of fiscal control caused by political ineptitude, economic stupidity and greed. As I have said previously
… the PIIGS will flounder from bail out to bail out but ultimately it will make little difference because they are currently tied to an economic model that neither supports them or allows them to make the necessary changes to alter their economic course. That is not to say that they are not to blame for many of their own woes, they certainly are, but it is by no means as clear cut as you will read in the mainstream media. The PIIGS were always going to be in trouble as soon as there was an economic downturn because they are trapped between the domestic policies of Germany and the inflexibility of the monetary system they signed up to when they joined the Euro.
All of the PIIGS are in the same boat, they simply allowed debt levels to get to a unsustainably high level because the monetary and fiscal environment did not provide the non-bank markets with a correct measure of the underlying nations real economic value. As I said before in reference to the EU macro-economic settings.
National governments kept issuing bonds to cover the ever growing debt while the backing of the ECB was giving the false impression to foreign investors that Greece was as safe a Germany. So while Germany kept exporting into Europe other national governments kept spending to cover the difference. Those countries appeared safe and relatively cheap to foreigners so in rolled the capital causing asset driven speculation.
The whole framework is an economic trap that requires prudent economic management by national governments…..
As soon as the EU was formed the fuse was lit, it was inevitable that economic stupidity, political opportunistic behaviour and corruption was going to lead to a collapse. But the real problem was that no one seemed be aware that once it did collapse the EU had no mechanism to deal with the fall out.
The Euro-elite have quickly decided that the mechanism to deal with this fallout is to keep the banks alive at all costs. The previous bailout deals with Iceland, Ireland and Greece have all had a “bank bondholder comes first” approach by forcing the citizens of the countries to take the pain by socialising the debt and forcing austerity on the nation.
I am not 100% sure who convinced them this is the approach to take, but it smells like a bankers solution to a banker problem to me. I can see little reason to take this approach outside the fact that all the banks including the ECB are themselves holding vast amounts of sovereign bonds as collateral on loans to each other. A recent EuroIntelligence article explains the interconnectivity issues of the EU banks. The banks all fear that any form of default will lead to a collapse of the entire system. They now seem to be playing a game of keeping the system afloat while trying to force the taxpayers of Europe to re-capitalise their balance sheets using whatever means possible. The only problem is that they are the same people who caused the problem by not completely understanding the system they had built, and they now falsely believe they have the ability to fix it.
But that is why you saw the EU step in early in Portugal back in January
Germany, France, and the IMF has recently put pressure on Portugal to accept financial aid from the EU. They are concerned that the bond market will turn on the small nation and drive yields on its sovereign debt so high that there will be a rush to bail Portugal out as was the case with Ireland and Greece.
A source told Reuters that “France and Germany have indicated in the context of the Euro group that Portugal should apply for help sooner rather than later.” All parties have denied the discussions to keep the international global markets from decisions that Portugal may default.
and you can be sure that they already had a plan to deal with the recalcitrant government of Portugal (more on that below ).
By late March Portugal’s government imploded.
Just as Portugal appeared to have dodged a bailout like those taken by Greece and Ireland, a domestic political spat was set Monday to worsen its financial troubles and possibly spoil Europe’s efforts to put the sovereign debt crisis behind it.
Portugal’s main opposition parties told the beleaguered minority government they won’t budge from their refusal to endorse a new set of austerity measures designed to ease a huge debt burden that is crippling the economy.
The next day the government fell.
The fall of Portugal’s government yesterday will add complexity to a regional policy approach that has failed to make much of a dent in solving the acute debt problems in the periphery of the euro zone. Portugal must now work with European partners to find a way to join Greece and Ireland in the EU/ECB/IMF intensive care unit. It will not be easy, and Portugal will engage only reluctantly given this ICU’s poor track record in returning patients to good health.
Portugal would need some pushing. “Luckily” the ratings agencies were there to provide the stick and the carrot.
Standard & Poor’s Ratings Services today lowered its long-term sovereign credit rating on the Republic of Portugal to ‘BBB’ from ‘A-‘.Moody’s
Conveniently, as noted by ZeroHedge, this meant that…
Following S&P’s lowering of its sovereign credit ratings on Portugal to BBB on Friday 25 March 2011, RepoClear participants are advised that with effect from Monday 27 March 2011 Portuguese Government bonds will no longer be eligible for delivery in any of the RepoClear €GC Baskets.
Until today’s downgrade Portugal had been eligible for the single A €GC Basket.
This is in line with LCH.Clearnet Ltd’s Regulations*, which state that while the criteria which define each of the eligible €GC baskets remains fixed, the countries’ debt meeting the defined criteria for inclusion in each basket may change from time to time. Where the combined credit rating of a country that falls within the definition of Euro zone countries changes, LCH.Clearnet Ltd will add or remove that country’s debt from each of the relevant eligible €GC baskets based on the new combined credit rating of that country.
All of a sudden Portugal’s banks found that their government’s debt was no longer ECB repo worthy and that meant that they no longer had any reason to purchase Portugal’s debt. After that Portugal had little choice but to ask for a bailout. Who said those credit rating agencies were good for nothing ?
So now that Portugal has no choice but to accept the bailout here comes the inevitable plan. Funnily enough it sounds just like the “plan” they had for everyone else.
Portugal has been served notice that it will need to endure years of unprecedented austerity, spending cuts, and tax rises if Europe is to rescue it from national insolvency to the tune of €80bn.
The daunting terms of the proposed three-year bailout were spelt out by EU finance ministers meeting in Hungary. It was clear that while the 17 countries of the eurozone are to bear the brunt of the bailout, Britain will also be liable for several billion euros in loans to Portugal through its participation in the emergency fund managed by the European commission.
Senior EU officials said the terms for the bailout were to be finalised by mid-May, a fortnight ahead of early elections in Portugal following the collapse of the centre-left government of José Sócrates, toppled last month when the opposition rejected his minority government’s austerity package aimed at fending off the need for a European rescue.
If the main political parties could not agree on Sócrates’s cuts package, they will now have to agree on a more savage programme dictated by the EU.
The Sócrates proposals will be merely a “starting point” for the austerity measures to be agreed with the European commission, the European Central Bank, and the International Monetary Fund, said Olli Rehn, the economic and monetary affairs commissioner.
The Finnish finance minister, Jyrki Katainen, went further.
“The package must be harder and more comprehensive than the one the parliament voted against,” he said. “The package must be really strict because otherwise it doesn’t make any sense.”
Actually it doesn’t make sense at all. Telling a country that has large public and private debt, a trade imbalance and no control over its monetary policy to cut spending will have the same effect it has had in every other country in the same situation. It will cause a sharp rise in unemployment and sharp fall in GDP. This will inevitably lead to further falls in government revenue which will make the problem worse not better. As this happens the EU and the IMF will tell the country that it isn’t trying hard enough and tell it to sell public assets and anything else that could actually help it get back on its economic feet and actually be able to pay the money back.
I can’t for the life of me work out why anyone thinks this plan will secure payment on loans past and present (Remembering these “bailouts” are just more loans). But that is simply what a “bankers” plan for an economy looks like. Take a look at Ireland, the first to be given this “plan” years ago.
Dublin released official data showing that gross domestic product fell by 1.6% in the final three months of 2010 and by 1% in the year as a whole.
Irish GDP has contracted by 12% in the three years starting in 2008, one of deepest contractions of any industrialised country after the financial crisis led to the collapse of its housing bubble and took its banks to the brink of insolvency.
And what does the future hold for Ireland under this plan?
Ireland’s GDP will shrink by 2.3pc this year, according to a forecast out this morning from a accountants Ernst and Young.
The firms’ latest Euro Zone Economic Forecast blames the fall on fiscal tightening, as well as ongoing weakness in the banking sector and the housing market.
It also expects unemployment this year to be 15pc, 50pc greater than the euro zone average.
The firm forecasts that consumption in Ireland in 2011 will fall by around 4.5pc – putting Ireland only ahead of Greece in terms of the lowest consumption levels across the euro zone. The forecasts are among the gloomiest yet for the Irish economy this year.
The 2.3pc drop in GDP compares with a decline of 0.8pc in 2010, the forecast says, adding that there will be a return to growth of 1.1pc in 2012.
The Euro-elite are their own worst enemies. They built a broken macro-economic model for their region and now have broken plans to fix the issues that have arisen from it. If you don’t think Spain suffers from the same issues then I advise you to check out their balance of trade chart below and their debt levels above. Look familiar ? Expect the oil price to make that worse in coming months.
