Portuguese near-default crisis – a rountable in the “black week”

A Conversation about the near-default in Portugal: the need for a clear political perspective

A virtual roundtable with 5 economists and financial analysts edited by Jorge Nascimento Rodrigues
© janelanaweb.com and contributor for Expresso Portuguese weekly newspaper, April 2010


. Portugal is a  Greece number two?

. What can Portuguese Government do to invert the risky near-default situation?

. The Euro zone risks a serial default wave?

. Greece must default and opt out from the euro?

. This turmoil is a failure of the European Monetary Union (EMU)?

. An European Monetary Fund (EMF) would be useful?

See PORTUGUESE PROFILE (Main figures Portugal and Greece Benchmark) at the END of the Roundtable


MARK THOMA (Univ. Oregon): « I think it is possible to invert the situation with poor policy choices, so the trick is to get policy correct»

1. The difficulty Portugal faces is due to its inability to implement the monetary policy it needs. Without such ability, the adjustment is on the real side of the economy – e.g. employment and output – and there simply aren’t any good choices. Thus, the government’s job is to minimize the painful adjustment that likely lies ahead, not an easy job.

2. I think it is possible to invert the situation with poor policy choices, so the trick is to get policy correct. That requires a unified approach to the problem that does not appear to exist, so the danger is there.

3. The stress is revealing the weak points in the euro system, e.g. the inability to use independent monetary policy to address financial problems. I’m not yet convinced that the union is in trouble, but the risks are clearly higher than I would have thought not all that long ago.

4. I think that a European Monetary Found would help. Unfortunately, it is difficult to create new, functional institutions while a crisis is underway so something like this could help next time, but it can’t help presently.

PETER COHAN (Peter Cohan & Associates, Boston): «It’s possible a serial default but not likely. »

1. It helps to look at some numbers and ratings.  Greece’s government bond rating is in junk territory with a budget-deficit-to-GDP ratio of 13,6%. Portugal is in better shape — S&P lowered Portugal’s credit rating two notches to A- which is still pretty good and it has a lower budget-deficit-to-GDP ratio of 9.4%.But there is growing concern about Portuguese debt. The gap between the yield on that Portugal’s 2-year notes rose to 4.3 percentage points above comparable German debt from 3.1 percentage points Monday. A week ago that spread was at 1.4 percentage points. It would take $53 billion to bail out Portugal and $120 billion to do the same for Greece.

2. I guess the Portuguese government could announce a major deficit reduction plan with specific targets and a schedule to repay debt early.

3. It’s possible a serial default but not likely.  I think some combination of the healthier EU countries and the IMF will step in to keep that from happening.

4. If it was just a matter of economics, it would be better for Greece to default and opt out.  But for political reasons which I do not understand, there seems to be an enormous barrier that blocks that logical, but painful move from happening.

5. To me this turmoil it’s a classic case that is similar to what happened during the financial crisis in the U.S.  The fiscally conservative members of the EU end up being punished for being sound while the ones who borrowed more than they could repay and hid that fact end up being rewarded by the healthy ones. I think that the EU admitted members who did not meet its standards of fiscal health for political reasons that I don’t understand and now those members could bring down the entire edifice.

6. There are two options: let the free market work – in the sense of culling the weak and letting them fend for themselves or punish the prudent by demanding that they bail out the countries that can’t repay what they owe.  If the EU survives this crisis with the same membership, it will be necessary to create some kind of insurance fund that can deal with such problems when they recur.  But who will pay for it?

BILL WITHERELL (Cumberland Advisors): « The Portuguese government has been following much more responsible steps to resolve the problem and international investors should recognize this difference. »

1. Portugal is not Greece. It has a difficult but different debt situation. A considerably larger share of its overall external debt is private sector debt. The Portuguese government has been following much more responsible steps to resolve the problem and international investors should recognize this difference.  Portugal’s situation is being seriously worsened by contagion from Greece, which is indeed an irrational over-reaction. But the underlying situation has worsened as a result as refinancing costs have soared. That has to be a major factor behind the downgrade.

2. The Portuguese government will have to resolve to take additional fiscal restraints and also to tackle more aggressively structural reforms that will help the economy become more competitive internationally.

3. Several defaults are not impossible. What I think is increasingly likely is a restructuring of Greece’s debt, with some capital loss. That should not be necessary for Portugal or Spain unless the loss of investor confidence gets significantly more severe than it has to date.

4. Other Members certainly should not force Greece to default (as that would have a heavy impact on other Members) nor force Greece to “opt out” – which would mean Greece leaving the EU. As I understand it, they cannot simply opt out of the Monetary Union. A Monetary Union without Greece would appear to be a stronger currency, but the political ramifications of such a process being forced on them could do severe harm.

5. This turmoil is a symptom of fragility, demonstrating the need for reforms that will result in stronger coordination and discipline in the area of economic policies. While Greece is the most flagrant in this area, along with (intentionally) providing unreliable data, most other EMU members have also slipped in the past in one way or another.

6. While a European Monetary Fund might be useful, I do not think it is necessary as long as members are willing to make use of the International Monetary Fund which has been established to deal with such problems.

DAVID CAPLOE (Economy Watch, Singapore): «The Portuguese government might, again PUBLICLY, request the rating agencies like S & P to make clear and open the criteria they are using to make their ratings — especially when they are compared to other, more advanced countries whose statistical profile is similar to Portugal, but whose rating they have NOT downgraded. »

1. There are obviously some sovereign debt similarities — but we certainly don’t know the extent to which, or even if, firms like Goldman Sachs were involved in the Portuguese situation, as they clearly were with Greece. And that definitely makes a difference from a general stability point of view. That said, the debt / GDP ratios of the two countries are also different, although Portugal’s is, unfortunately, trending in a negative direction. Still, Greece’s is well above 100% and Portugal’s well under, so while I agree there’s a disturbing trend in Portugal’s sovereign debt situation, I don’t think the situations are structurally analogous at all. As for the markets reactions, well, we just ran an excellent piece from a German analyst who pointed out quite clearly how market speculators thrive on political ambiguity, of which Germany’s Angela Merkel has, unfortunately, contributed an outsize portion to the Greek situation.

2. Well, far be it from me to tell the Portuguese government how to handle a VERY tricky and dynamic situation — there are NO easy or clear answers. What I would suggest is that they PUBLICLY request the ECB / IMF / and other Euro-zone institutions to put a hold on obvious speculator / hedge fund plays on Portuguese debt for the next two weeks — similar to what the Greek government has done in banning “shorts for the next two weeks — until there can be a little more order and predictability in the entire situation. Beyond that, I don’t think there’s much they CAN do except wait for the otherwise seemingly inevitable onslaught of the speculators. In that context, though, they might, again PUBLICLY, request the rating agencies like S & P to make clear and open the criteria they are using to make their ratings — especially when they are compared to other, more advanced countries — if, indeed, there are any 😉 — whose statistical profile is similar to Portugal, but whose rating they have NOT downgraded. Indeed, I think it’s high time a little focus is put on the rating agencies themselves whose record is anything BUT blameless in this on-going disaster.

3. It’s POSSIBLE to have BOTH a “true default” AND a serial default within the Euro-zone. As we have continually pointed, there is a structural problem in the Euro-zone, which could be papered over as long as the global and European economies were doing well, but which became painfully evident in the aftermath of Black September 2008 and the lending freeze imposed by the Too-Big-To-Fail US banks, that immediately created what we now refer to as The Great Recession. So, unfortunately, BOTH of these are real possibilities, ESPECIALLY as long as the political leadership of the Euro-zone as a whole, and the major individual countries — above all, of course, Germany — remain unable / unwilling / unclear about how to make sure such defaults DON’T occur.

4. I can’t see ANY scenario in which forcing Greece out of the Euro-zone does ANYTHING but heighten the crisis, and make it worse for everyone — most particularly, the “next” such countries, namely Portugal, Spain, and — hold your breath — Italy, which was one of the original EEC 6 back in 1959. The default of Greece, and its expulsion from the Euro-zone — again, especially in the crass and chaotic way in which it would have to be done … IF it were to be done — would really throw the entire project into question. And while there are certainly problems with keeping the Euro-zone together — above all, bringing the fiscal, i.e., government spending, policies of ALL the countries into line, just as has occurred at the monetary level — dealing with those problems are INFINITELY preferable to letting the Euro zone collapse a) at all, and b) in such an undignified and uncontrolled fashion. There are also just too many real economic links among the Euro-zone countries to make such a de-linkage even thinkable, so, as Paul Krugman correctly said when this crisis first emerged, there really is no way to go but forward.

5. Certainly the fragility, as we have noted, and of a structural problem within the Euro-zone, namely, as above, the conflict between a single monetary policy formulated by the European Central Bank, and fiscal, or government spending, policy, which remains in the hands of the 16 member countries, and which, to be sure, they are going to be VERY reluctant to cede to ANY sort of “supreme” power. Now this is NOT a problem that can any longer paper over, as it was until Black September 2008, and there are neither immediately visible, let alone easy, solutions to this problem. Nevertheless, as we have noted, Europe as a whole — not just the Euro-zone — HAS become deeply unified by real economic links that ARE working, and which DO contribute to a genuine European solidarity. So while I think this DOES represent a structural crisis within the Euro-zone, I ALSO think there are counter-veiling forces to keep the zone together, and I think the test of real leadership — which, to be honest, has been sadly lacking in the current generation of European and, to be honest, American, political leaders as well — is whether they can find a way to BUILD on this genuine REAL ECONOMIC inter-connection to solve this problem between fiscal and monetary policy. It certainly won’t be easy, but it CAN be done — IF the leaders involved act like such, and have the VISION to use the existing base to solve admittedly difficult problems.

6. I think a European Monetary Fund (EMF) probably is necessary, and I don’t think it’s a bad thing for such a body to be created, especially as part of a transition from a situation of 16 fiscal policies vs. 1 monetary policy to whatever else may take shape. The IMF has plenty on its plate already, and, while it does seem a necessary part of an immediate solution to the Greek situation, I think neither it nor Europeans really WILL be comfortable with it being a permanent feature of the European political economic scene. So I think that an EMF is a very good idea, one whose creation could engage European creativity of the sort that oversaw the creation of the European Coal and Steel Community in the mid-50s, and then the European Economic Community, and return to the convertibility of European currencies, at the end of 1958. Obviously, the “deals” that will have to be made will be a bit more complex than those — which basically secured French markets for German industrial goods, and German markets for French agricultural goods — but I don’t think it should be beyond the capacity of Europeans to create such a body to help ease the inevitable strains of transition from 16 fiscal policies to somewhat fewer, even if not yet a single one.

GARY DYMSKI (Univ. California): « But if Europe fractures, then it’s every country for itself, and the nations with weaker positions will indeed have to adjust more – and will be riskier from a ‘solvency’ viewpoint – in future years.»

1. Portugal’s situation and that of Spain resemble the situation of Greece in some ways – for example, fiscal deficit as a share of GDP, trade balance, and so on. The fact that these Southern European nations have “structural deficits” on trade and on government expenditure is not surprising when we consider the overall structure of production and trade within the Euro area. High-productivity production and export capacity is monopolized by Germany and France, and lower-wage production and export capacity by other portions of the periphery of Europe. If a balance-sheet of Europe is drawn up, these national “problems” disappear in an overall picture of Europe’s strength. But here there is a catch-22. If Europe remains strong, then the markets will evaluate Europe as a whole, thinking of individual nation-states as part of this entity. But if Europe fractures, then it’s every country for itself, and the nations with weaker positions will indeed have to adjust more – and will be riskier from a ‘solvency’ viewpoint – in future years. But this raises the question of what is Europe? Is it the Euro? Is Germany being so cautious because it doesn’t want to set a precedent? Claro! But if Greece is given an unworkable deal that will fail, why should the markets believe there is any better future ahead for Portugal or Spain?

2. The Portuguese government has to mobilize on three levels: it has to work with other threatened nations to come up with common goals and ideas; it has to work within the Euro framework on behalf of the threatened nations, and it has to mobilize the population to fight for a decent standard of life and the maintenance of a real social safety net.

3. I think it is possible to imagine a scenario of serial defaults. We are seeing no political will for more creative solutions in Germany or France at the moment; the UK has a stagnant, wounded economy and is a by-stander; the US has a stagnant, wounded economy and has its own issues; and China is trying to outrun a housing bubble.

4. As I suggested, I think the nations that are being targeted by speculators have to come together to share ideas and come up with a common set of plans and proposals. In other words, Portugal and Spain, at the very least, must talk with Greece about the default/opt-out scenario and show some solidarity. For Portugal or Spain to side with Germany against Greece would be suicidal for the vision of  “one Europe.” What is needed now is a strong, clear, honest conversation about what “one Europe” means in the post-neoliberal world.

5. The turmoil in Europe represents the collision between the collapse of the conditions for continued accumulation under neoliberal conditions (financialization, market liberalization, race-to-the-bottom export-led growth, etc.) and the rules that were established for the Euro zone (in particular the Euro, the regulation of European banks, and European fiscal/monetary policy coordination. The Euro zone rules were adapted for a world of zero-sum tradeoffs wherein one country’s ‘win’ is another’s ‘loss’. That was the theme for growth in the neoliberal age; only the structural imbalance that permitted the US and to a lesser extent Northern Europe to act as “consumers of last resort” provided any scope for growth in that world. But that growth was, of course, based ultimately on a very fragile basis – and then, as we know, it collapsed.

6. From what I’ve suggested, Europe needs to rethink the terms and conditions of its union, and this means at core the institutional mechanisms it has available to resolve problems. It was assumed in putting Europe’s current rules into place, that Europe’s strength could be maintained only by disciplining those countries too weak to discipline themselves. The liberalization of markets that also accompanied the Euro zone, plus the actions of deregulated banks, created a situation in which structural imbalances unimagined previously came into existence. So simple discipline will not do any more. The conversation ultimately involves a very basic question, which no politician is prepared to answer: “What human rights and economic protections does a person have a right to, if that person is a European?”  Politicians in France answer that question regard the French; in Germany, regarding the Germans; etc. But not for Europe as a whole. And within each country, indeed, there are questions about “who is French?”, “who is German?” etc., that lead in very troubling directions. Indeed, in the end we have this question, “What human rights and economic protections does a person have a right to, given that that person is a human being?” In the end, the only end to this global crisis will come when we are ready to face that question. Until then, we live in the twilight.

PORTUGUESE PROFILE (Benchmark with Greece)

GDP 2009 (IMF list): $227.9 bn (Greece: $330.8 bn)

Population (Jan.2010): 10.6 m (Greece: 11.3 m)

GDP per capita PPP (2009): $21,859 (Greece: $29,882)

Average projected real GDP growth rate 2010-2011 (IMF/WEO): 0.47% (Greece: -1.53%, recession)

Unemployment rate: 10.8% (Greece: 10.2%)

Gross National Saving as % of nominal GDP (2009, National Accounts OECD): 8.1% (Greece:7.7%)

Refinancing needs for outstanding bonds 2010-2012 (Monthly Bulletin, IGCP, May 2010): €40,1 bn (Greece: €123 bn)

Direct Public debt ratio to GDP (2009): 77% (Greece: 115%)

General Government Gross Debt ratio to GDP (2009): 77.2% (Greece: 113.4%)

Public deficit ratio to GDP (2009): -9.4% (Greece: 13.6%)

Projected General Government structural deficit ratio to GDP (2010): -7.1% (Greece: – 8.9%)

Projected public debt ratio to GDP in 2012: 90.7% (Greece:148.8%)

Difference from boom to bust: 3.1 (Greece: 9.9)

Impact of fiscal adjustment on output relative do baseline: -5.3% (Greece: -24.8%)

Total Gross External Debt as % GDP (2009): 225% (Greece: 168.2%)

Net External debt position as % of GDP (2009): 88.6% (Greece:82.5%)

Total Gross External Debt as % Exports (2009): 817% (Greece: 832%)

Gross External Liabilities as % of GDP (2009): 281.5% (Greece: 188.4%)

Government gross external debt as % tax revenue (2009): 189% (Greece: 329%)

General Government net external debt as % of GDP: 74.9% (Greece: 78.9%)

Net International investment position as % of GDP (2009): 111.7% (Greece: 82.2%)

General Government debt hold abroad as % GDP (2009): 60.2% (Greece: 99%)

Projected Current account balance as % GDP (2010): -8.6% (Greece: -7%)

Projected Budget Balance as % of GDP (2010): – 7.9% (Greece: 10.2%)

Deterioration of the Real Effective Exchange Rate (1999-2008) based on the Nominal Unit Labor Cost of total Economy: 15.9 % (Greece: 12.4%)

Deterioration of the Real Effective Exchange Rate (1999-2008) based on the Nominal Unit Labor Cost of Manufacturing:  13.6% (Greece: 24.4%)

BIS Reporting banks consolidated claims on public sector as % GDP (2009): 23% (Greece: 32.3%)

Rating sovereign debt (S&P, April 2010): A- (Greece: BB+, junk status)

Peak CDS cost (April 27, 2010, daily close numbers): 385.89 basis points (Greece: 823.72 bp)

Peak Compound Probability of Default (May 6, 2010, daily close numbers): 32.63% (Greece: 52.61%)

European Banks exposure to Portuguese Debt: $244 bn (Greece: $206 bn)

Interest Rates 10-year government bonds (June 10, 2010): 5.23% (Greece: 8.15%)

Defaults in the recent past: 4 events – 1828; 1837; 1850; 1892 (Greece: 4 events – 1826; 1843; 1860; 1894)

Time Horizon to revert to a “bearable” public-debt level of 60% of its respective GDP (IMD Debt Stress test): 2037 (Greece:2031)

Sources: IMF GSFR 2010 (April); Daniel Gros and Alcidi Cinzia (VOX, April 23, 2010); S&P (April 27, 2010); CMA DataVision; IMF World Economic Outlook 2010 (April); FT Deutschland; IMF General Statistics; This time is different Chartbook 2010, NBER, Carmen Reinhart; Bloomberg BusinessWeek, April 29,2010; IMD Debt Stress test, IMD May 19, 2010, IMD World Competitiveness Center; BIS Quatertly Review (June 2010); The PIGS’ External Debt Problem, Ricardo Cabral (VOXeu.org, May 8th,2010); The Economist, June 10th, 2010; Current Account Imbalances in the Southern Euro Area, Florence Jaumotte and Piyaporn Sodsriwiboon (IMF, Workong Paper 10/139, June 2010).

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