Portugal Next To Fail
By Ambrose Evans-Pritchard
So must Europe’s leaders, who comfort themselves that Greece is a special case because it cheated, and that Ireland is a special case because it allowed its “Anglo-Saxon” banks to go berserk. They have yet to acknowledge the deeper truth that monetary union has insidiously destabilised much of Europe and trapped a ring of largely innocent countries in depression.In my experience it is hazardous for English-speaking journalists to write about Portugal withoutbeing accused of betraying the Aliança Velha, or pursuing a perfidious Palmerstonian agenda.
It is an article of faith – an Iberian trait – that Portugal is the victim of an orchestrated calumny intended to divert attention from a bankrupt Britain, or America. The rating agencies are deemed agents of Anglo-Saxon hegemony.
So with some trepidation, let me point out that Portugal will have a current account deficit of 10.3pc of GDP this year, 8.8pc in 2011, and 8.0pc in 2012, according to the OECD. That is to say, Portugal will be unable to pay its way in the world by a huge margin even after draconian austerity.
This is the worst profile in Europe. It requires a drip-feed of external funding that can be shut off at any moment, and undoubtedly will be unless the global economy goes full throttle into another boom. Or as the IMF puts it, “the longer the imbalance persists, the greater the risk the adjustment will be sudden and disruptive”.
Note that Ireland – however wounded – will have a surplus of 0.7pc next year, and 3.2pc in 2012 as IT industries and pharma exports drive a rebound. The Irish “internal devaluation” may conceivably pay off. (Britain may also be in surplus, thanks to a sovereign currency that has taken some of the strain.)
Yes, Portugal’s public debt is manageable at 86pc of GDP – although even that figure is in question. Opposition leader Peder Passos Coelho said over the weekend that the real figure is 122pc, accusing the government of “fictitious” accounting. Be that as it, public debt is not the core problem. Private debt is one of the highest in the world at 239pc (Deutsche Bank data), and the events of the last two years have taught us that private excess lands on the taxpayer one way or another in a crisis. A chunk of this is owed to foreigners, and must be rolled over.
Portuguese banks have been well-behaved. There is no property bubble. But as the IMF points out in its Article IV report, the banks have a “heavy reliance” on external funding, equal to 40pc of total assets. It was a funding crisis that killed Northern Rock, not bad loans. The IMF also says Portugal has the eurozone’s most rigid labour markets, and that social transfer costs have risen to 22pc of GDP from 18.5pc in 2005. Productivity is stuck at 64pc of the eurozone average, unchanged since the early 1990s. The promised EMU catch-up effect never occurred.
Finance minister Fernando Teixeira dos Santos admits a “high risk” that Portugal will need a rescue, berating Germany for setting off the latest crisis by scaring investors with talk of bondholder haircuts. “We were like the soccer player ready to kick for goal, and then someone fouls us, but this time there was no penalty,” he said. Well, up to a point Senhor. He also let slip that if Portugal were not in the eurozone “the risk of contagion might be lower”. Senhor, if Portugal were not in the eurozone, it would not be in this disaster at all. The country was still in surplus on its external accounts in the early 1990s. It was pushed by the risk-free illusions of EMU into the red to the tune of 109pc of GDP. Under the escudo – literally “shield” – it would never have been able to amass so much foreign debt, and would now be able to claw its way back to health with a weaker exchange rate. The origins of this crisis go back to Portugal’s fateful decision to push for euro membership at least 20 years before it was ready. Lisbon then failed to tighten fiscal and credit policy enough to offset a fall in interest rates from 16pc to 3pc as Portugal prepared to join in the 1990s – if it is possible to offset monetary error on such a scale. Portugal saw its competitiveness destroyed by the boom, and has never been able to get it back.
The country has been in perma-slump ever since with a Teutonic currency that raises the bar ever higher. It has lost swathes of low-tech industry to Chinese and East European rivals faster than it can create high-tech alternatives. Portugal has in a sense been the victim of EMU, a casualty of ideology, wishful thinking, and untested academic theories by Nobel laureates about optimal currency unions. By the time the eurozone crisis began to blow up in Greece a year ago, it was probably too late already for Portugal. The government then made matters worse by letting its budget deficit creep higher over the first half of the year, while the rest of the Club Med slashed frantically. It is hardto see how Portugal will meet a deficit target of 7.3pc for 2010 agreed with EU.
Premier Jose Socrates hoped global recovery would lift Portugal off the reefs. Perhaps he had little room for manouvre anyway without a majority in parliament. Events caught up with him in September. He has at last been forced to impose the standard EMU mix of wage cuts and 1930s debt-deflation, causing the Left flank of his party to disintegrate as disgusted members peel off to the Communists and the eccentric Bloco. Fiscal policy will be tightened by 4pc of GDP next year – as the economy contracts 1.4pc (IMF) – in pro-cyclical torture likely to end badly in an economy with total debt of 325pc of GDP.
The bond markets suspect that such a policy is self-defeating, and since they now know that Chancellor Angela Merkel is going to make them share the clean-up bill, they are ever less willing to fund the experiment.The eurozone will face its moment of existential danger the day that Portugal is forced to tap the EU bail-out fund. A third rescue in months will push the combined bill towards €300bn (£257bn) and risk exhausting the political capital of EMU, leaving little left for Spain even if the European Financial Stability Facility can in theory handle one more domino. Chancellor Merkel was assured in May that words would be enough to chase away speculators and restore calm to Europe’s bond markets, that the “shock and awe” effect of a €750bn safety-net would conjure away the crisis without the need for real money. This bluff is now being called.
What happens if Spain tips back into recession in 2011, and or when Spanish banks start coming clean on the true scale of their property losses, and Spanish companies have trouble rolling over foreign loans? What happens if Spanish 10-year bond yields creep above 5pc? Can Mrs Merkel go back to the Bundestag and request fresh money to boost the collateral of the EFSF in order to cope with the next casualty?A reader asked me this week whether there is any graceful way to avoid this coming chain of disasters.Yes, there are two options, neither entirely graceful. The European Central Bank can print money like a drunken sailor, flood the bond markets with €2 trillion, and tank the euro against China’s yuan for good measure.If the Germans refuse to accept this, they should abandon EMU at once, leaving France and southern Europe with the residual euro and the institutions of monetary union. Existing euro debt contracts would be upheld. Germany would revalue – alone or with Finns, Dutch, etc – so holders of Bunds would enjoy a windfall gain.France could revive the Latin Union of the late 19th Century, a more benign venture than the Máquina Infernal now asphyxiating Portugal, and deflating Spain. Any better ideas out there?
Comment from Christopher M. Quigley
If Angel Merkel is happy to allow Germany default on bonds in 2013 Ireland, to save its Nation, should plan to default also. It should not wait until 2013 it will be too late. A top team of negotiators, who understand the markets, should organize a planned default of all non sovereigndebt.By the way given the latest CSO report I put the total figure of “dodgy debt” within the banks(on and off balance sheet) at 750 billion. This figure must be flushed out for and for all and put to bed. Then and only then can the healing begin. Under the current arrangement we are only buying 6 months until Spain collapses should it be unable to roll over debt as it comes due.
I to concur with Christopher yesterdays “recovery plan” from the Government is an absolute disaster once again the government failed to address the elephant in the room .The Banks are holding enormous debts and the government once again are trying to convince the markets and “our European friends” that we as a Nation are able to pay back this private debts by crucifying the Irish taxpayers .This is just plain ridiculous! The government is displaying their mindboggling ignorance of the real extent of the bank bad debts and after 22 months this is shocking and it tantamount to treason on their behalf!
Equally shocking is the fact the established political parties are all singing the same crap and we have to now seriously consider their competences as an alternative to the current clueless economic terrorists in Government.
Yesterday was an opportunity to place the entire facts on the table for the Irish Nation to see
We are intelligent people and do not take kindly too been treated like fools. Politicians in general have lost touch with ordinary people. Cocooned in their parallel Universe Called “The Dail “
For God Sake and the sake of the country face the facts.
We cannot pay these private debts and that is that, so No to this madness we do not have to pay this debt we have suffered for the last two years on behalf of gambling bondholders, but no more! If Cowen and lenihan want to pay them that’s fine they can pay themselves out of their own substantial wealth pools but the ordinary taxpayers have had enough .For any contract to have any legal standing it is first reasonable to assume that the parties under contract have presented all the facts and in this case that is clearly not the case in fact we the Irish Nation are the victims of a massive Fraud and people must go to jail .Don’t give me “We are where we are crap”
We will face “The real facts” but we also must see crooks go to jail and I mean all of them Politicians ,Bankers, and developers, and civil servants and none of them must be allowed to benefit from their incompetence at best and treason in the worst case.