View Full Version : European Financial Crisis: It's not over

Spion Stirlitz
07-04-11, 04:49
Portugal seeks bailout as eurozone crisis hits third nation


ROME— From Thursday's Globe and Mail

Published Wednesday, Apr. 06, 2011 4:02PM EDT

Portugal became the third European country in less than a year to seek a bailout when it finally admitted it was effectively broke, a development that could infect neighbouring Spain and even cause political damage to German Chancellor Angela Merkel, whose country funds the single biggest proportion of the rescue packages.

“In this difficult situation, which could have been avoided, I understand that it is necessary to resort to the financing mechanisms available within the European framework,” Finance Minister Fernando Teixeira dos Santos said in a humiliating statement Wednesday night delivered only hours after Portugal was forced to offer stunningly high interest rates to find buyers for its short-term debt.

Some economists feared that the debt contagion could hurt neighbouring Spain, Portugal’s biggest trading partner, even though Spain’s economy seems to be turning around.

“With Portugal in the bailout camp, markets might turn their attention to Spain,” said Benjamin Reitzes of Toronto’s BMO Nesbitt Burns. Spain’s economy is six times larger than Portugal’s, so a debt crisis there poses a much greater risk to the fragile European economy.

The Portuguese bailout would push the total rescue bill for the eurozone’s clapped-out economies to almost €300-billion. In May, Greece accepted an emergency loan package worth €110-billion from the European Union and the International Monetary Fund. Six months later, it was Ireland’s turn; its bailout was valued at €85-billion.

Portugal’s rescue mission is expected to cost as much at €80-billion, though it may be several weeks before the loan size and conditions are known. The three bailouts have one aspect in common: In each case, their governments insisted repeatedly that none was needed, and in each case investors did not believe them.

The debt crises in each country have also proven to be politically deadly. Mishandling the economy ended the career of Greek prime minister Kostas Karamanlis in late 2009. His replacement, George Papandreou, was forced to launch aggressive government spending cuts in exchange for the emergency loans, triggering riots, protests and strikes across Greece as entitlements and wages were reduced.

In Ireland, Enda Kenny swept into power in March after voters held his predecessor, Brian Cowen, responsible for a debt and banking crisis that had plunged the country once known as the Celtic Tiger into a miserable economic recession, complete with housing bust.

Portugal’s Prime Minister, Jose Socrates, is another debt-crisis victim. He tendered his resignation on March 23 after parliament rejected his latest austerity program. Snap elections were called for June 5.

The political crisis heaped onto a debt crisis was instrumental in sealing Portugal’s fate as Europe’s newest financial cripple. Since the government collapsed, Portugal has been clobbered by a series of debt downgrades by the debt ratings agencies and ever rising bond yields. Earlier this week the rate on Portuguese bonds reached almost 10 per cent, close to triple the level paid by benchmark German bonds, which are considered Europe’s least risky debt.

Unlike previous bailouts to Ireland and Greece, Portugal’s rescue is not expected to rock the markets because it was fully expected by investors. They had been treating the tiny country’s bonds as increasingly high-risk purchases, demanding higher and higher rates to compensate for funding the debt. In essence, the soaring interest rates made it impossible for Portugal to fund itself.

Several Portuguese banks had been urging the Lisbon government to accept financial assistance because they felt Portuguese debt was becoming too risky to buy. The government needs to make almost €5-billion in debt repayments this month, and €7-billion in June.

“In some ways [the bailout request] is a positive,” David Dietze, chief investment strategist at Point View Financial Services in New Jersey, told Reuters. “On this side of the pond, no one understood exactly how Portugal was going to dig out of its problems without getting aid.”
Portugal was always one of the weakest economies in the eurozone – the 17 EU countries that share the euro – with traditionally high unemployment, inflexible labour laws and governments that paid scant attention to improving overall competitiveness. As a result the country was ill prepared to get through the financial crisis of 2008 and 2009.

In 2009, its gross domestic product fell 2.6 per cent. It recovered somewhat in 2010, only to lose momentum this year as rising debt levels and interest payments ripped holes in the national balance sheet. Government debt as a percentage of GDP is expected to reach 92 per cent next year, up from 62 per cent in 2008.

The Portuguese bailout could harm Ms. Merkel, who only reluctantly supported the bailouts of Greece and Ireland. The bailouts have not been popular with German voters, who considered Greece and Ireland wholly responsible for their own problems.

On Wednesday night, Jose Manual Barroso, the European Commission president who is a former Portuguese prime minister, said in a statement that he is confident of Lisbon’s ability to “overcome the present difficulties,” adding that “this request will be processed in the swiftest possible manner according to the rules applicable.”

Just how swift is an open question, because Mr. Socrates now leads a caretaker government, one that may lack the constitutional authority to negotiate and sign a bailout package. Portugal may find itself in financial limbo until a new government is elected in June.


08-10-11, 05:32
Spain's rating has been downgraded today, Dexia (Belgian-French bank) is on the rocks, Belgium's note is on the verge of a downgrade due to its stalling politics and economy. It's not over yet, indeed... In fact, it's just the beginning...

08-10-11, 12:37
Spain's rating has been downgraded today, Dexia (Belgian-French bank) is on the rocks, Belgium's note is on the verge of a downgrade due to its stalling politics and economy. It's not over yet, indeed... In fact, it's just the beginning...

I completely agree. We're in a stage of an ongoing chain of events that will make 2008/Lehman Brothers look like a rehearsal. The combined effects of the Euro debacle and US debt levels are exposing the vulnerabilities of the overly inter-dependent global capitalist system.

16-10-11, 00:12
One sure way to find a solution to the current situation is to drop the eurozone as we know it and allow countries that are in deep trouble to devaluate and renegociate their debt. What do you think about it? IMO, it makes sense to cut the leg (and a couple of fingers in this case) in order to save the patient.

16-10-11, 02:28
I would just cut off incurable limbs, sort of speak. For example, cut off Greece, forgive portion of debt to manageable level. Print the money and give it to banks (recapitalize them), the ones that would run into cash flow problem having too much Greece's debt. Don't give these banks too much money, to recapitalize all of Greece debt, but just enough to keep them afloat. They need to pay consequences giving risky debts. I know printing money would increase inflation of Euro, but in current circumstances is the best way to recapitalize banks and lower the debt level. Somewhat lower Euro would have a positive effect in industries and businesses, at least for most of them.
Next time a new country join, they need to sign off their fiscal policy to EU. Besides this, economical regulations, fiscal polices, Euro bank settings have to be run by a panel of economists, experts in finances, and not the politicians. Economy should be set aside from politics for ever. We know what works with great level of certainty. We have countries trying different models of economy and we can see the results. Let's pick what works and implement by powers of EU (it should have such) to countries that are failing with their models, like Greek model of economy.

17-10-11, 22:56
We agree on Greece being out of the game, as in fact they should never have got in in the first place. As for your suggestions, interesting, they would need a couple of generations to be implemented (remember, this is the EU...), thanks to the very democratic and painstakingly slow work pace of our great mother institution. Setting the ECB free of political reins is utopic and dangerous, it would be giving too much power to people who could work their way up dodgy style (imagine a Seth Blatter-type CEO...). Devaluating is a quick fix solution, as it wouldn't solve much. The countries that are doing not-so-bad to well will recover and attract more clients from the non-EU space, but countries that are deep in the mud will stay there cause they have nothing to sell.
Your last remark is very pertinent. I am writing from Poland, where I am on holidays. Why Poland? cause it is cheap. 15 years ago, I would have gone to Spain or Italy (food, climate, cheap currencies). The Poles and czech should never get into the Eurozone, they would lose their edge.
To finish, I agree on reforming the system, but I think the current problems have a lot to do with debt, lifestyle, management of unemployment and population psyche than the model of economy. I mean, when the Greeks start living like the Germans, there is something wrong...