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Portugal, the next front in the eurocrisis
#1


The Commission on Portugal: Is This for Real?


A quick note on Portugal. Let’s start from three facts:

  • Austerity did not work. Portugal is in a recessionary cycle. The economy will shrink by 2.3 per cent this year, more than twice as much as the previous government forecast (and the slowdown of exports to the rest of the eurozone, is not helping).
  • Austerity is self defeating: the deficit-to-GDP ratio widened from 4.4 per cent in 2011 to 6.4 per cent last year, and is forecasted to be 5.5 per cent in 2013. Far above the target of 3 per cent that the government had agreed with the Troika. My guess is that it will be even larger than that.
  • The magic wand of confidence is not magic. The budgetary cuts did not boost private spending, and expectations remain gloomy. The Financial Times article cites the Portuguese daily Público writing “Portugal has entered a recessionary cycle. People have no reason to believe the future will be any better. The [adjustment] programme has failed and has to be changed.” So long for the confidence fairy…

Is this surprising? Not at all. Austerity is likely to be recessionary and self-defeating, when a number of conditions are met. (a) Monetary policy is at the zero lower bound, and cannot compensate the recessionary effects of budget cuts with interest rate reductions. (b) Trading partners are also in a slump (and/or they are also implementing austerity measures), and hence exports can not substitute for decreased domestic demand. © The private sector is deleveraging, and subject to a credit crunch. This is pretty much a description of the current situation in the eurozone. Can anybody not blinded by ideological faith in expansionary fiscal contractions, believe that austerity today is not self-defeating? And yet, today we were  given the opportunity to read the  statement by the European Commission on Portugal. It is so incredible that it is worth reproducing it in its entirety:

The European Commission welcomes that, following the decision of the Portuguese Constitutional Court on the 2013 state budget, the Portuguese Government has confirmed its commitment to the adjustment programme, including its fiscal targets and timeline. Any departure from the programme’s objectives, or their re-negotiation, would in fact neutralise the efforts already made and achieved by the Portuguese citizens, namely the growing investor confidence in Portugal, and prolong the difficulties from the adjustment.

The Commission therefore trusts that the Portuguese Government will swiftly identify the measures necessary to adapt the 2013 budget in a way that respects the revised fiscal target as requested by the Portuguese Government and supported by the Troika in the 7th review of the programme.

Continued and determined implementation of the programme offers the best way to restore sustainable economic growth and to improve employment opportunities in Portugal. At the same time, it is a precondition for a decision on the lengthening of the maturities of the financial assistance to Portugal, which would facilitate Portugal’s return to the financial markets and the attainment of the programme’s objectives. The Commission supports that such a decision be taken soon.

The Commission will continue to work constructively with the Portuguese authorities within the parameters agreed to alleviate the social consequences of the crisis.

The Commission reiterates that a strong consensus around the programme will contribute to its successful implementation. In this respect, it is essential that Portugal’s key political institutions are united in their support.

To summarize, the Commission is happy that the Portuguese government chose to ignore a ruling of its constitutional court (“welcomes that…&rdquoWink; it threatens to cut funding if the Portuguese government does not follow its prescriptions (“it is a precondition for a decision…&rdquoWink; it is in a state of denial on confidence (“the growing investor confidence…&rdquoWink; it recommends that democratic discussion does not take place (“it is essential that key political institutions are united in their support…&rdquoWink

This goes beyond my wildest thoughts. I checked, and nobody moved April fool’s day to April 7th. This is for real, and it needs no additional commenting…

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#2


Portugal’s elder statesman calls for 'Argentine-style' default



Portugal's leading elder statesman has called on the country to copy Argentina and default on its debt to avert economic collapse, a move that would lead to near certain ejection from the euro.


Mario Soares, who steered the country to democracy after the Salazar dictatorship, said all political forces should unite to “bring down the government” and repudiate the austerity policies of the EU-IMF Troika.

“Portugal will never be able to pay its debts, however much it impoverishes itself. If you can’t pay, the only solution is not to pay. When Argentina was in crisis it didn’t pay. Did anything happen? No, nothing happened," he told Antena 1.

The former socialist premier and president said the Portuguese government has become a servant of German Chancellor Angela Merkel, meekly doing whatever it is told.

“In their eagerness to do the bidding of Senhora Merkel, they have sold everything and ruined this country. In two years this government has destroyed Portugal,” he said.

Dario Perkins from Lombard Street Research said a hard-nosed default would force Portugal out of the euro. “It would create incredible animosity,” he said. “Germany would be alarmed that other countries might do the same so it would take a very tough line.”

Mr Perkins said all the peripheral states are “deeply scared” of being forced out of EMU. “They fear their economies would collapse, which is ridiculous. But in the end voters are going to elect politicians who refuse to along with austerity as we are seeing in Italy, and the EU will lose control,” he said.

Raoul Ruparel from Open Europe said Portugal had reached the limits of austerity. “The previous political consensus in parliament has evaporated. As so often in this crisis, the eurozone is coming up against the full force of national democracy.”

The rallying cry by Mr Soares comes a week after Portugal’s top court ruled that pay and pension cuts for public workers are illegal, forcing premier Pedro Passos Coelho to search for new cuts. The ruling calls into question the government’s whole policy “internal devaluation” aimed at lowering labour costs.

A leaked report from the Troika warned that the country is at risk of a debt spiral, with financing needs surging to €15bn by 2015, a third higher than the levels that precipitated the debt crisis in 2011. “There is substantial funding risk,” it said.

In a rare piece of good news, eurozone finance ministers agreed on Friday to extend repayment of rescue loans for Portugal and Ireland by a further seven years, reducing the pressure for a swift return to markets.

Brussels said both countries are “still highly vulnerable” to forces beyond their control, and deserve a “strong signal” of support. Critics say it is too little, too late. Fast-moving events on the ground now have a will of their own.

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