Portugal Passes Bailout Review – Economy Set to Tank Further
As a result of having shot whatever credibility it may once have possessed over the (still ongoing) Greek debacle, the eurocracy is eager to prove that Greece will indeed remain a 'unique case'.
As a brief reminder, Greece went from 'no euro are nation will ever be allowed to default' in May of 2010 to '21% haircut and voluntary private sector involvement' (VPSI) in early 2011, to '50% haircut and VPSI' in late 2011 to 'de facto 75% haircut and all private sector bondholders subordinated to the ECB, plus collective action clauses inserted' (i.e., PSI, but clearly no longer 'voluntary') today. As an added twist, no-one knows if that will be enough (on Friday, German finance minister that a 'third bailout of Greece cannot be ruled out').
In order to sell the second Greek bailout to their increasingly restless constituencies and parliaments, the chief eurocrats have been at great pains to stress the 'extraordinary, never to be repeated case' storyline in the context of the bailout.
They not only worry about their domestic political backing of course, but also about 'locust-dom', to borrow a phrase from ex Italian premier Silvio Berlusconi, this is to say, the congregations of evil speculators that populate financial markets and refuse to buy the bonds of bankrupt governments.
Hence Portugal can not be 'allowed' to cross over the Jordan anytime soon. Never mind that last year, the government only managed to achieve its overly ambitious deficit goals by basically stealing a few billions worth of pension assets from the banks. As readers may recall, Hungary finds itself in hot water with the EU over similar fiscal legerdemain.
This is not to belittle the fact that Portugal has undertaken a number of genuine economic reform steps, specifically with regards to the liberalization of the labor market. However, anyone with only passing knowledge of the country's economic history should be aware that the Portuguese government has never been able to be anything but fiscally incontinent.
Moreover, were the economic and fiscal facts weighed objectively, it would be crystal clear that the country remains a basket case and is likely to become more of one.
Portugal is therefore lucky that such an objective assessment is currently an impolitic thing to do – the eurocracy urgently needs positive examples that show that its bailout policies can 'work'.
“Portugal has passed the third review of its 78-billion-euro bailout programme by the European Union and IMF, Finance Minister Vitor Gaspar said on Tuesday, reiterating this year's fiscal goals will be met despite a worsening economic outlook.
"The result (of the evaluation) was positive despite unfavourable conditions. The mission confirmed the fulfillment of the criteria demanded by the terms," Gaspar told a press conference, adding that the inspectors will recommend the disbursement of a new tranche of 14.6 billion euros.
He said an economic slowdown in Europe made the government revise its projection for 2012 economic contraction to 3.3 percent from 3 percent.
Under the bailout, Portugal has to cut the budget deficit to 4.5 percent of gross domestic product this year from a goal of 5.9 percent last year, which was met thanks to a one-off transfer of banks' pension assets to the state.
The terms of the bailout also require that the country show progress on economic reforms, such as changes to its rigid labour laws, to improve competitiveness.
Many economists say the country may have to seek more emergency funding. But European officials have played that down, hoping to differentiate Portugal from troubled Greece.”
Portugal's gross external debt amounts to € 372 billion as of end of December 2011, or roughly $ 500 billion. This is nearly $47,000 in external debt per man, woman and child in the country, or roughly 217% of the country's GDP. The total is only slightly below the total external debt of Greece, while on a per capita basis, is it actually slightly higher. Evidently, even 'small insignificant Portugal' could conceivably capsize the euro Titanic contagion-wise if its crisis were to deepen.
Below are a few economic data points describing the country's economic and fiscal history. Keep in mind that the country's current account deficit is currently mainly financed via the 'TARGET2' stealth bailout mechanism.
Portugal's current account deficit, in millions of euros – click for higher resolution.
Portugal's current account deficit as a percentage of GDP – click for higher resolution.
Portugal's government debt-to-GDP ratio – click for higher resolution.
Portugal's budget deficit as a percentage of GDP, with last year evidently excluding the pension assets theft (with managed to lower the total to 5.9%) – click for higher resolution.
Portugal's GDP growth rate – the economy has been in recession in 10 of the last 15 quarters, with the current quarter the 5th consecutive quarter of economic contraction – click for higher resolution.
Portugal's industrial production, year-on-year percentage change. The most recent decline is accelerating – click for higher resolution.
Portugal's business confidence index is plumbing fresh lows – click for higher resolution.
Portugal's unemployment rate is reaching depression-like proportions – click for higher resolution.
2012 is also an important year as a fairly big chunk of government bonds comes due – it is in fact the second biggest 'debt rollover' year of the next decade.
All the more reason therefore to keep 'market confidence' intact. The market's assessment of Portugal's prospects is usually marked by wild manic-depressive oscillations, with the long term trend continuing to point in the 'wrong' direction, even though the ECB's LTRO extravaganza has kept the lid on this particular boiling pot in the short term.
What isn't quite clear to us is how and why, in view of the above depiction of the country's economic history, its is supposed to escape the fate of becoming a copy of the Grecian death-spiral. Admittedly it is too early to pass judgment on the efficacy of the already enacted and yet to be introduced economic reforms, but last year's pension asset theft can obviously not be repeated. No wonder then that the government has lately been pleading for 'more time' with its bailout lenders. What is also not quite clear is whether the population's willingness to put up with the joys of eurocracy-imposed austerity is imbued with the eternal and abiding patience that will be required to actually see the process through.
Portugal's annual government bond rollover schedule in billions of euros. 2012 is the second biggest rollover year of the coming decade – click for higher resolution.
Color us unconvinced as to the likelihood that the 'model student' will remain in the troika's and the market's good graces as the year progresses. We continue to believe that Portugal is the most likely next flashpoint of the debt crisis. As a relatively small country, the resources it has at its disposal to deal with its crushing debt burden are quite limited and the market undoubtedly knows that.
The fact that it has just passed a troika review of the bailout program may support Portuguese government bonds in the short term, as the biggest worries about this year's debt rollovers should be assuaged. The big question is for how long this state of quietude will last.
Charts by: Tradingeconomics, Der Spiegel
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Most read in the last 20 days:
- Modi’s Great Leap Forward
India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions. India’s Pride and Joy Indians are...
- Global Recession and Other Visions for 2017
Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations. The New Year is here, after all. Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad. But what else will happen? Image of a recently discarded vision... Image by Michael Del Mundo Here we begin by closing our eyes and slowing our breath. We let our mind...
- US Financial Markets – Alarm Bells are Ringing
A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
- The Great El Monte Public Pension Swindle
Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years. There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island. El Monte, California, is one of those places. Advice dispensed on Interstate...
- A Trade Deal Trump Cannot Improve
Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things. Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
- Pope Francis Now International Monetary Guru
Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated. Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
- Where’s the Outrage?
Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous. The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class. In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid. Believe me. I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
- Trump’s Trade Catastrophe?
“Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute - Larry Summers is wrong about almost everything. Could he be right about this? Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
- Money Creation and the Boom-Bust Cycle
A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote: I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
- Trump’s Plan to Close the Trade Deficit with China
Rags to Riches Jack Ma is an amiable fellow. Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl. At a moment of peak inspiration, he executed his first search engine request by typing in the word beer. Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
- Side Notes, January 14 - Red Flags Over Goldman Sachs
Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold. The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
- Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action. Photo via thedailycoin.org The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices. Prices of gold and silver...