Wednesday, March 16, 2011
Perspective: Portugal Faces New Economic Challenges
By Grant de Graf
WSJ reports:
Moody's Investors Service issued a two-notch downgrade on Portugal's long-term government bond ratings, citing subdued growth prospects and productivity gains over the near term until structural reforms are enacted.
Apparently, a contributing factor towards the downgrade is "implementation risks for the government's austerity plan, which has faced opposition from the center-right Social Democrats."
Portugal's government is facing political turmoil that threatens to derail its ambition to solve the crisis alone. The nation's Social Democrats are opposed to the minority government's new austerity measures announced Friday that called for further spending cuts and boosted state revenue by further tax increases.
This is the point where I loose it. In summary: with the country facing increasing debt levels, the government initiates austerity measures, in a belt-tightening campaign against public spending. A scheduled program of commitments to repay debt is fast approaching due date, so Portugal successfully issues a series of bond auctions in the open market. Investors are a touch nervous, so interest rates yields are a little higher. Actually, quite a lot higher, about 200 basis points above previous auction levels of 4%.
WSJ elaborates: The nation is at the center of a storm that has already hit Greece and Ireland, as it is struggling with a high budget deficit that must be brought down to 4.6% of gross domestic product this year and 3% in 2012, from around 7% last year.
Interestingly, this is paltry compared to Japan's percentage government deficit to GDP of 200% before the earthquake, Italy's of 120% and France's deficit to GDP of 85% - go figure.
Portugal's Prime Minister Jose Socrates believes that if the new austerity plan was voted down in parliament, his government would likely face early elections and that a "political crisis would inevitably cause the country to request external help."
The point however that needs to be made, is that even if Portugal appeals to the European Central Bank for an extended credit line in a post election scenario, that facility will come with stringent terms, calling for further austerity measures.
This would be no different than the position in which the Irish currently find themselves, with Government officials from Ireland trying to make a case for new terms for their credit line from the ECB, balanced against further demands from the EU for an increase in austerity. Certainly, nothing would really be achieved through an election in Portugal, other than an opportunity for the dog to bite its tail.
The predicament in which Portugal finds itself, is a function of the disparity between fiscal policy and monetary policy that is a challenge for all EU members. It is impossible to fiscally meet the demands of a local electorate, when monetary policy is being dictated centrally in accordance with interests that are very different from local needs. Both Ireland and Portugal may be compelled to opt out the confinement of the Euro, which is inhibiting growth, constraining domestic needs, and reducing political strength.
WSJ reports:
Moody's Investors Service issued a two-notch downgrade on Portugal's long-term government bond ratings, citing subdued growth prospects and productivity gains over the near term until structural reforms are enacted.
Apparently, a contributing factor towards the downgrade is "implementation risks for the government's austerity plan, which has faced opposition from the center-right Social Democrats."
Portugal's government is facing political turmoil that threatens to derail its ambition to solve the crisis alone. The nation's Social Democrats are opposed to the minority government's new austerity measures announced Friday that called for further spending cuts and boosted state revenue by further tax increases.
This is the point where I loose it. In summary: with the country facing increasing debt levels, the government initiates austerity measures, in a belt-tightening campaign against public spending. A scheduled program of commitments to repay debt is fast approaching due date, so Portugal successfully issues a series of bond auctions in the open market. Investors are a touch nervous, so interest rates yields are a little higher. Actually, quite a lot higher, about 200 basis points above previous auction levels of 4%.
WSJ elaborates: The nation is at the center of a storm that has already hit Greece and Ireland, as it is struggling with a high budget deficit that must be brought down to 4.6% of gross domestic product this year and 3% in 2012, from around 7% last year.
Interestingly, this is paltry compared to Japan's percentage government deficit to GDP of 200% before the earthquake, Italy's of 120% and France's deficit to GDP of 85% - go figure.
Portugal's Prime Minister Jose Socrates believes that if the new austerity plan was voted down in parliament, his government would likely face early elections and that a "political crisis would inevitably cause the country to request external help."
The point however that needs to be made, is that even if Portugal appeals to the European Central Bank for an extended credit line in a post election scenario, that facility will come with stringent terms, calling for further austerity measures.
This would be no different than the position in which the Irish currently find themselves, with Government officials from Ireland trying to make a case for new terms for their credit line from the ECB, balanced against further demands from the EU for an increase in austerity. Certainly, nothing would really be achieved through an election in Portugal, other than an opportunity for the dog to bite its tail.
The predicament in which Portugal finds itself, is a function of the disparity between fiscal policy and monetary policy that is a challenge for all EU members. It is impossible to fiscally meet the demands of a local electorate, when monetary policy is being dictated centrally in accordance with interests that are very different from local needs. Both Ireland and Portugal may be compelled to opt out the confinement of the Euro, which is inhibiting growth, constraining domestic needs, and reducing political strength.
Tuesday, March 15, 2011
10 Year Bond Yield Plunges
10 Year Bond Yield Plunges: Consequence of Earthquake Disaster [Flight to Safety]
EU in Reshuffle to Package Bailouts
By Grant de Graf
WSJ reports: "Euro-zone finance ministers reached no agreement Monday on precisely how the bloc's 17 members will share the burden of enlarging bailout funds, and put off discussions until next week.
"But despite the unresolved details, markets reacted warmly to Saturday morning's announcement of a pact to expand the euro zone's current bailout capacity. In trading Monday, the prices of Spanish, Portuguese and Greek bonds jumped, bringing down their interest rates and reflecting improved investor confidence."
The market's positive response to Greek bonds is attributable to the new deal that Greece has secured with the Euro Union: namely, restructuring the loans that have been extended to that country, with a reduction in long-term borrowing costs. Greece has in turn agreed to dispose of some significant parcels of real estate owned by the government, in the open market and apply further measures of austerity. Neil Ferguson would argue that this is in effect a default, merely packaged in an attractive wrapper. Still, I am left scratching my head as to how long the Greek community will tolerate the austerity measures, which are bound to exacerbate rising unemployment.
WSJ reports: "The pact is "particularly positive for Portugal," said economists at Danske Bank in a research note, since it expands the ability of euro-zone policy makers to come to the country's aid. Portugal's persistent deficits have led investors to believe it is likely heading for a bailout."
The EU has always shown a commitment to come to the assistance of ailing member countries. Unity within the union has never been stronger. With the comfort of a Big Daddy in the waiting room, I am puzzled as to why the market even priced in the bonds that Portugal issued, at the price that it did. Portugal has always indicated a commitment to austerity and provided projections indicating positive growth. If ever there was an arbitrage opportunity it was here: the buy Portuguese and sell German bond trade. Clearly, the spread should be expected to narrow.
Ireland has rejected the EU's demand for that country to increase corporate tax. That meant that the EU refused to restructure the terms of its loans to Ireland. There is always a danger that the EU oversteps its mark in dictating policy to its members. However that is a consequence of being part of a union. You lump it or leave it.
In the long term it is difficult to envisage an EU that succeeds in sustaining member loyalty and attachment to the Euro. Currently, the Euro impedes the weaker countries from any meaningful recovery through imprisonment with the Euro straight-jacket. Effected countries are being held to ransom by the bailout rescue packages the EU can offer. In the end Germany and France will pay dearly. The price will be a withdrawal of support for those governments. If the EU is unable to change its terms of membership to the union, it is probable that the political map will look very different in the not too distant future and that both Merkel and Sarkozy will be serving their countries in different capacities, that they are today.
Monday, March 14, 2011
Friday, March 11, 2011
How Did Economists Get It So Wrong? - Paul Krugman
How Did Economists Get It So Wrong? - Paul Krugman
A reflection on the credit crunch initially posted September 2, 2009
Thursday, March 10, 2011
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