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Thursday, 7 April 2011

Sadly, Portugal is giving in to blackmail by its own large banks.

Another one bites the dust… 
And another one gone and another one gone
Another one bites the dust hey
Hey I'm gonna get you too
Another one bites the dust

Queen – Another one bites the dust

Portugal has finally given in to the pressure of the countries of the Euro zone and the large Portuguese banks. The country asked the other Euro zone-members for their “slice of the pie” from the current and future European bail-out fund.

The Financial Times writes two articles about it. The first describes the amount of money that is going to be borrowed by the Portuguese government. The second is a must-read editorial about how Portugal was blackmailed by its own large banks. Here I show the most important snips of these articles.

Cost of Lisbon bail-out put at €80bn
Economists expect Portugal to negotiate a European Union-led bail-out totalling €70bn-€80bn ($114bn) to finance its public debt and support its banks over the next three years.
Portugal is the third eurozone country, after Greece and Ireland, to ask for a bail-out. But doubts remain over the extent to which the country’s caretaker government can negotiate a full rescue package with the European financial stability facility, the EU’s bail-out fund, ahead of a general election on June 5. Thursday over the ability of rival political parties to compromise over the austerity measures and economic reforms that will be required as conditions for receiving aid.
However, shares in Portuguese banks leapt as the market priced in the likely funding support for lenders. The assistance will ease the pressure on banks that have seen their credit ratings cut to “dangerous levels never experienced before”, José Sócrates, Portugal’s outgoing prime minister, said on Wednesday evening as he announced he had requested emergency aid.
Let’s get those pocket calculators ready: a country with 10.7 mln people that had an estimated GDP in 2010 of $223.7 bln (€166 bln), gets a loan of maximum $114 bln (€80 bln) to get out of their financial misery for the meantime. That is $10,000 per capita for this loan alone. How the hell these guys are going to pay it back?!
Even if they would save 5% of their GDP every year, it will take them 20 years to pay only this loan back. And what will happen with the other debt that Portugal is suffering from?! When is Portugal going to pay that back? Amanhã (tomorrow)??

Banks 1, Portugal 0

Another eurozone country has been humbled by its banks. Earlier this week, Portugal’s banks were threatening a bond-buyers’ go-slow unless the caretaker government sought financial help from other European Union countries. After being beaten up in Wednesday’s debt auction, Lisbon has waved the white flag. The country’s caretaker leaders have now admitted that Portugal will need outside help.
There is no denying that Portugal faces deep problems. The yield on the country’s five-year bonds had touched 10 per cent. On Wednesday, it was forced to pay 5.9 per cent simply to secure one-year money.

The editorial concludes that it was a bad decision of the government to give in to the blackmail attempt of the banks, as it is now inevitable that the country asks assistance from the EFSF (European Financial Stability Facility) in June after the elections. And according to the editorial Portugal must not give in to the 2nd demand: seeking an immediate bridge loan, as this is very expensive and makes the negotiations on the conditions of the EFSF very hard. Everybody then knows that Portugal needs the money desperately.
I will add this: it was bad to give in anyway. Today, tomorrow, whenever!! No country cures from having too much debt, by taking more debt. It doesn’t matter from whoever this debt comes. Especially not when the conditions for receiving this debt are harsh.  
The only solution to get out of this crisis is to allow countries to let their sovereign bond holders take a haircut, under the conditions that they put themselves under legal restriction of the healthier countries in the Euro zone.  I know this sounds like Professor Mish speaking (, but that is because I totally agree with him on this subject.
The Eurozone should stop this bailout madness and it should stop it now!

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