Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

LQD: Hyenas look to Portugal

by Metatone Sat Apr 17th, 2010 at 08:07:30 AM EST

With the Greek member of the Euro herd under (some? imperfect?) protection by other members... the hyenas look for another stragger - Portugal?

The Next Global Problem: Portugal « The Baseline Scenario

What happened to the global economy and what we can do about it The Next Global Problem: Portugal

with 65 comments

By Peter Boone and Simon Johnson

The bailout of Greece, while still not fully consummated, has brought an eerie calm in European financial markets.  It is, for sure, a massive bailout by historical standards.  With the planned addition of IMF money, the Greeks will receive 18% of their GDP in one year at preferential interest rates.  This equals 4,000 euros per person, and will be spent in roughly 11 months. 

Despite this eye-popping sum, the bailout does nothing to resolve the many problems that persist.  Indeed, it probably makes the euro zone a much more dangerous place for the next few years. 

Next on the radar will be Portugal.  This nation has largely missed the spotlight, if only because Greece spiralled downwards.  But both are economically on the verge of bankruptcy, and they each look far more risky than Argentina did back in 2001 when it succumbed to default.

The main problem that Portugal faces, like Greece, Ireland and Spain, is that it is stuck with a highly overvalued exchange rate when it is in need of massive fiscal adjustment.  Portugal spent too much over the last several years, building its debt up to 78% of GDP at end 2009 (compared to Greece's 114% of GDP and Argentina's 62% of GDP at default).  The debt has been largely financed by foreigners, and as with Greece, the country has not paid interest outright, but instead refinances its interest payments each year by issuing new debt.  By 2012 Portugal's debt-GDP ratio should reach 108% of GDP if they meet their planned budget deficit targets.  At some point financial markets will simply refuse to finance this Ponzi game.

To resolve its problems, Portugal needs major fiscal tightening.  For example, just to keep its debt stock constant and pay annual interest on debt at an optimistic 5% interest rate, the country would need to run a 5.4% of GDP primary surplus by 2012.  With a 5.2% GDP planned primary deficit this year, they need roughly 10% of GDP in fiscal tightening.  It is nearly impossible to do this in a fixed exchange rate regime - i.e., the eurozone - without massive unemployment.  The government can only expect several years of high unemployment and tough politics, even if they are to extract themselves from this mess. 

front-paged by afew


Reading the rest of the piece, it feels pretty gloomy.

Standard economics brings us: Depression in GPS (Greece, Portugal, Spain) or breakup of the Euro?

What nags at me is that I don't think this is just a currency/government borrowing problem. If we take seriously the question of the EU-27 it seems plausible that in the short run, the move of industry to the cheap labour (and high skill) zones of the post-Communist states leaves a big hole in the economic growth of some of the original member states...

Display:
What stinks more is the ideological load of this exercise:

First, people continue to talk only about state debt. It almost seems like that state debt is hell and private debt is virginal and pure. If state debt is that important then, in theory, Portugal fares not that bad and Spain fares very well.

(could not find any better, but you can find better charts in the tubez).

PIGS seems more a racist slur coming from highly conservative anglo-saxons who are coward and avoid their real target (in some sense it seems to me like an attack on Germany and the EU by proxy - via weak Eurozone members).

That being said, I think there are good reasons to doubt the soundness of Iberia (structural trade deficits, construction, energy dependence, debt held by external parties, ...)... but similar things could be said over anglo countries... But these issues do not reinforce the fundamentalist church of the-state-is-bad-and-big-capital-is-good.

PS - I am far from being a fan of the EU, but that does not make me note that this really seems an attack at it.

by t-------------- on Fri Apr 16th, 2010 at 08:57:25 AM EST
"PS - I am far from being a fan of the EU, but that does not make me note that this really seems an attack at it.
"

Argh... Mean:

PS - I am far from being a fan of the EU, but that does not stop me noting that this really seems an attack at it via proxy of its weak links.

by t-------------- on Fri Apr 16th, 2010 at 08:58:43 AM EST
[ Parent ]
Just today, in El Periodico [de Catalunya] there is an interview with Joe Stiglitz in which he say, among other things
Pero la estupidez de los mercados lleva a que solo miren el pasivo y no el activo. Cuando analizan las empresas miran el patrimonio neto, no solo las deudas. En el fondo es un planteamiento ideológico tendente a reducir el peso del Estado.
The stupidity of markets leads them to only look at liabilities and not assets. When they analyse firms they look at the net equity, not just the debts. At the bottom it's an ideological approach tending to reduce the weight of the State


The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Fri Apr 16th, 2010 at 09:03:15 AM EST
[ Parent ]
European Tribune - LQD: Hyenas look to Portugal
the move of industry to the cheap labour (and high skill) zones of the post-Communist states leaves a big hole in the economic growth of some of the original member states...

Be interesting to who's been moving the industry...

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Apr 16th, 2010 at 09:00:33 AM EST
Germany?

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Fri Apr 16th, 2010 at 09:05:58 AM EST
[ Parent ]
Bingo
by Metatone (metatone [a|t] gmail (dot) com) on Fri Apr 16th, 2010 at 09:24:18 AM EST
[ Parent ]
I thought
"Germany is no longer, as a matter of course or of principle, the motor, heart and savior of Europe," said Constanze Stelzenmüller, a senior fellow of the German Marshall Fund in Berlin. "This isn't the Europe we signed up for. It's much larger, much poorer, and we have to take care of our own."


The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Sat Apr 17th, 2010 at 03:07:10 AM EST
[ Parent ]
Something more is afoot.

My math for Greece is not adding up.

They have 440k bureaucrats averaging under 20k in euros annually. Gov't budget is 40 billion. GDP is 250 billion. Debt is 300 billion.

When you add things up, it's very hard to blame the debt on the bloated bureaucracy, and also to imagine that you can cut into that debt by restraining the bureaucracy.

I'm sure pensions/social security will also figure in greatly, but here we are talking about a small nation. It's recent scandals have been about big bribes paid by corporations and private developers to politicians who approved projects that had perhaps little value when it comes to increasing economic activity.

$15 billion on the Olympics.
$15 billion a year in military hardware
$3 billion on a bridge to nowhere.

Those are just three projects, but when we're talking an annual budget of 40 billion, you begin to sense that something is really wrong.

by Upstate NY on Fri Apr 16th, 2010 at 10:01:24 AM EST
[ Parent ]
"Adding up" to find the truth doesn't matter.  The important bit is a constant stream of hysteria in the financial press.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Fri Apr 16th, 2010 at 11:32:03 AM EST
[ Parent ]
Public service wages are usually just a tiny fraction of the government budget; the real cost is in what they do: the money they redistribute through the welfare system, or spend on education and health and roads.
by IdiotSavant on Fri Apr 16th, 2010 at 06:23:19 PM EST
[ Parent ]
and military and boondoggles.
by Upstate NY on Sat Apr 17th, 2010 at 10:33:13 AM EST
[ Parent ]
Deficits as high as 50% of GDP are ok as long as run by english speaking states.

Johnson should look home for the Ponzi scheme(s).

You might find me At The Edge Of Time.

by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Fri Apr 16th, 2010 at 11:31:07 AM EST
Btw, you folk may not get these news, but Treasury auctions in Portugal have been consistently met with demand of twice or thrice the base line issuance.

Just this week a 2 year note auction with a base line of 300 million € harnessed demand for more than 2 000 million €, the Treasury opting to cut at 1.715%, selling 800 million €. This obviously made a lot of people upset.

You might find me At The Edge Of Time.

by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Fri Apr 16th, 2010 at 11:38:53 AM EST
[ Parent ]
The interest rate for Icelandic government bonds was steadily falling prior to and during the Great Iceland Bankruptcy™.

None of this stuff has, to any practical purpose, any basis in reality.

Near as I can tell.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Apr 19th, 2010 at 12:28:27 AM EST
[ Parent ]
Luis de Sousa: Deficits as high as 50% of GDP are ok as long as run by english speaking states.

I was skeptical, but looks like you're right:

Don't throw bricks...European debt levels compared | Worldmapping beyond mere description - 2010.3.24

The following map compares the total debt of the EU-27 countries and the debt's share of the GDP - revealing some interesting views: In sheer numbers, the PIGS are not alone (Greece, in fact, almost not counting). Eventually, we're all in the same boat in the sea of gloom (click map for larger view)...

["Country sizes proportional to each country's total debt"]

What's more,

Global recovery? The real dimension of external debt | Worldmapping beyond mere description - 2010.4.6

... it is not only the Eurozone, but most Western countries in a deep crisis - global inequalities the other way around this time - this is a topic that will be with us for months (and years) to come and still a long way to go on the road to recovery. So, keep this picture in mind:

["Country sizes proportional to each country's total external* debt"]

And:

Gaian Economics: Lies, Damned Lies, and Economic Statistics - 2010.4.1

... The graph illustrates how The Economist sees the situation (it illustrates the ratio of debt to GDP for a number of countries). These data were derived from World Bank sources. They seem to bear little resemblance to what the UK is reporting to the EU and offer no justification for the singling out of Greece for a particular beating by the foreign exchange markets. Given that these figures do not include either our private debts or our off-balance-sheet debts, it is a miracle that the pound is still trading at all

I'm not clear about the significance of the word "external" in the phrase "external debt" for the second graphic.

The point is not to be right, but to get to right.

by marco on Fri Apr 16th, 2010 at 01:16:23 PM EST
[ Parent ]
the Economist apparently did not use the same numbers as the CIA & World Bank.  In fact, even the ordering of the values is different.  Something is not right.

The point is not to be right, but to get to right.
by marco on Fri Apr 16th, 2010 at 01:22:55 PM EST
[ Parent ]
For starters, it is my guess that they are using figures for total debt, public and private, vs. GDP. These figures for the USA seem similar to ones for total debt to GDP that Steve Keen posted last summer.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Apr 16th, 2010 at 02:18:20 PM EST
[ Parent ]
Up to 2007:

_____

UK

Economics Essays: Why Current Accound Deficit Persists - Economics Help - 2009.12.17

Source: ONS retrieved Dec 14th 2009

______

More detail on Portugal:

Portugal Sustains: Roots of the Problem | Seeking Alpha - 2009.1.12

... Of course another of the problems Portugal will have in 2009 is that of financing and reducing its current account deficit, which is estimated by the IMF to have hit 12% of GDP in 2008. In particualr I would draw attention to the structural damage to the income account (see chart below) which has been caused by the external financing required by so many years of running such large deficits. Thus as we get into 2010/11 the risk of a serious financing problem on the back of a pair of "twin deficits" which simply get worse and worse is hardly to be taken lightly.

______

More detail on Spain:

Spain's Current Account Deficit Folds In On Itself | Spain Economy Watch - 2009.10.2

The net debt chart illustrates quite clearly why the ability to issue debt denominated in your own currency is one of the most treasured possesions of any sovereign state. Basically Spain's debt is in euros, and since the Spanish treasury and central bank have no capacity to create euros, or to devalue the currency, the only way to correct Spain's distortions is via and long slow and hard process of ideflation (also known by the more politically correct title of internal devaluation, which doesn't make it any easier or less painful as we can see now in Latvia).

My bold.

_______

More detail on Greece:

Greece Needs to Implement a Significant Internal Devaluation | Seeking Alpha - 2009.12.16

Greece needs to implement a significant internal devaluation, as without this, correcting the fiscal deficit will only involve playing around with the tip of the iceberg, and default in the longer term will become inevitable.



The point is not to be right, but to get to right.
by marco on Fri Apr 16th, 2010 at 02:14:07 PM EST
[ Parent ]
No UK in the first graph?

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Fri Apr 16th, 2010 at 02:26:13 PM EST
[ Parent ]
would seem to agree with you:

PIIGS - Wikipedia, the free encyclopedia

A great deal of the recent turmoil on Greek bond markets appears to be the result of selective reporting and speculative financial market activity. Given the very large external funding requirements of all the Anglo-Saxon countries the recent crisis also appears to be an attempt to draw international capital away from the Euro Area in order that countries, such as the U.K. and the U.S. can continue to fund their large and growing external deficits which are matched by large and growing Government deficits. Anglo-Saxon countries do not have large domestic savings pools to draw on and therefore are completely dependant on external savings. This is not the case in the Euro Area which is completely self funding.

Some economic commentators have used the sell off on the Greek government bond market as a justification for imposing 'austerity' policies on Greece in exchange for access to European funds, funds which would help to marginally lower borrowing costs. It is not at all clear that it is in Greece's economic interests to impose fiscal austerity on an economy already in recession in exchange for the dubious benefit of obtaining lower domestic interest rates. Tighter fiscal policy would merely offset the positive impact of lower borrowing costs and, in addition, social disruption would likely have a significantly negative impact on investment and growth.

In essence, in exchange for cheaper funding from the EU Greece and other countries would, in addition to losing control over monetary policy and foreign exchange policy, also lose control over domestic fiscal policy. EU economic domination would therefore be complete.



The point is not to be right, but to get to right.
by marco on Fri Apr 16th, 2010 at 02:21:06 PM EST
[ Parent ]
This all being said, everybody is now asking the Hyenas for a loan. And the debt loads are high (cross this with an age of scarcity and de-growth). If you need the Hyenas...

At the end of the day, the solution is to go the Brazil way: byte the bullet, generate surplus, pay the Hyenas. Show them the finger (as in... we don't need you).

It is not unclear that this cannot be done with minor effort: as long as people accept that a yearly trip to Cancun and the last iPad are not really necessities. Plus, of course going after much useless wealth accumulators.

by t-------------- on Fri Apr 16th, 2010 at 12:45:32 PM EST
Long term I certainly agree that exposing yourself to the hyenas is asking for trouble.

Although I also wonder if government borrowing inherently needs to be from hyenas in the first place - why do our fiat money systems magically require private debt issuance at point X instead of point Y?

Either way, it's not something that can be changed overnight... the question of the moment is will the round of speculators keep going after countries on the edge of the Euro? And will that finally force one of them to leave?

by Metatone (metatone [a|t] gmail (dot) com) on Fri Apr 16th, 2010 at 03:01:16 PM EST
[ Parent ]
why do our fiat money systems magically require private debt issuance at point X instead of point Y?

Because our fiat money systems are run by people beholden to Friedmanite ideology.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Sat Apr 17th, 2010 at 03:08:24 AM EST
[ Parent ]
Naaah! Because it allows the rich to better extract from the masses.

Align culture with our nature. Ot else!
by ormondotvos (ormond.otvosnospamgmialcon) on Sat Apr 17th, 2010 at 02:33:00 PM EST
[ Parent ]
The latter is the purpose of the former.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Apr 18th, 2010 at 07:54:40 PM EST
[ Parent ]
If CDS Traders Are Right, France Is Next Up For A Sovereign Shakedown (As Are Spain And Portugal); Greece Long Forgotten

CDS traders were prescient in snapping up Greek and Dubai CDS long before anyone else realized the risk these countries are in (well, more like Goldman selling CDS to some very close clients, wink wink). In exchange for figuring out what it took cash bond holders months to understand, these 'speculators' made a lot of money and in the process got branded as quasi-sovereign terrorists. Well, Greece can sleep well: according to the latest DTCC CDS data (for the week ended April 9), CDS specs have completely deserted Greece, which saw the single biggest amount of Net Notional CDS decrease, to just over $8 billion, a reduction of $367 million in the prior week (which means all the widening in Greek spreads is now, and has been, just cash bond sales, precisely what Zero Hedge has claimed all along). CDS traders are now focusing their attention on the one country which has so far slipped under everyone's radar, yet which we disclosed is more on the hook in terms of Southern European exposure than even Germany: France, with $781 billion in total claims. Should Greece topple the PIIGS dominoes, France will implode. And this is precisely what CDS traders are betting on now, taking advantage of absurdly tight France CDS levels. Also, just in case they are wrong on France, Spain and Portugal, not surprisingly, round out the top three names in which Net Notional saw the largest increase. Also not surprisingly, Japan rounds out the top 5 deriskers.

From a state debt and deficit (that silly "main" criteria), France is similar to Portugal and worse than Spain.

This really smells more and more to an attack on the EU.

by t-------------- on Sun Apr 18th, 2010 at 08:20:10 AM EST
Well, the Wall Street Journal did report on the dinner this summer in NYC in which European debt was discussed.

We can't forget, too, that CDS's are under the table private deals, and that we have no idea what it out there, so the banks will quote the index and say, See, there's not that much in CDS's out there, but then when there's talk of the market becoming more transparent so that everyone can see what is going on, then suddenly there's outrage, which for me implies the market is bigger than we know. And that makes sense. Investors probably don't want people to know how much they personally are exposed on any given investment.

Also, we can't forget that the investment banks are the ones who originate the CDS contracts, at a low price. Then there's a momentum play, the contracts get driven up, the investors panic, start buying up CDS at a premium, and the originators are laughing all the way to the bank. Some of them even end up buying short-term bonds whose yields have been driven up in the panic.

This is a momentum play, a kind of reverse pump-and-dump, and it relies on the skittish psychology of investors.

by Upstate NY on Sun Apr 18th, 2010 at 12:07:23 PM EST
[ Parent ]
PIIGS Claims On European Banks: $1.5 Trillion; France Most On Hook In PIIGS Implosion | zero hedge
According to the IMF, the total amount of foreign claims, in this case focusing on Southern Europe countries, better known as PIIGS, on European international banks is $1.54 trillion. And while many have claimed that Germany would stand to lose the most from an implosion in the European periphery, that is in fact not true true: with $781 billion, France has much more at stake than Germany, whose banks have "just" $522 billion in "Southern European" claims. And while the IMF cut German GDP forecasts in large part due to the country's exposure to Southern Europe, it appears that France is next on the chopping block.

click on picture to enlarge

The source of the above data is IMF report titled: "Germany: 2010 Article IV Consultation--Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Germany" in


"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Sun Apr 18th, 2010 at 12:08:13 PM EST
[ Parent ]
"while still not fully consummated"

Fairly apt description, because somebody's going to get screwed on that deal.

by tjbuff (timhess@adelphia.net) on Sun Apr 18th, 2010 at 01:05:05 PM EST
Is Simon Johnson - like Niall Ferguson - engaged as a "consultant" by a large Macro fund like Brevan or similar??  I always get the feeling when I read almost everything he's written recently that he is directly talking someone's book. I understand when the WSJ does similar it is ideological, but I truly get a visceral shot in my gut something is not kosher with this guy....
by NihonCassandra (rusol1@yahoo.com) on Tue Apr 20th, 2010 at 04:23:39 AM EST


Display:
Go to: [ European Tribune Homepage : Top of page : Top of comments ]