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Wednesday, 4 May 2011

Portugal: the deal is done. Alas…

What I was already afraid of at April 7, has now indeed happened. Portugal received a 3-year support package to the value of €78 bln ($115 bln) from the European Financial Stability Fund and the IMF. The Financial Times is reporting on this story. Here are the pertinent snips, combined with some comments from me: 
Portugal has reached an agreement with the European Union and the International Monetary Fund on a €78bn ($116bn) financial rescue package, becoming the third eurozone country to be bailed out of a sovereign debt crisis. 
In a brief television address on Tuesday night, José Sócrates, the country’s caretaker prime minister, said the deal was demanding, but indicated that the terms were not as tough as those agreed with Greece and Ireland.The EU and IMF had recognised that “the situation in Portugal is far from being [as serious] as in other countries,” he said. “Knowing other external assistance programmes, Portugal can feel reassured.” 
This is the kind of blah-blah you can expect from a politician that wants to be re-elected. It is like one deathrow prisoner saying about another: “his situation is much more serious. He will be brought to death tomorrow and I only next week”. Portugal is the one of the poorest countries in Europe and it has a much lower GDP per capita than f.i. Greece and Ireland. On April 7, I wrote this about this loan from the EFSF:

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)?? 

The FT again:

Under the plan, Portugal has agreed to reduce its budget deficit from 9.1 per cent of gross domestic product in 2010 to 5.9 per cent this year. The previous target for 2011 had been 4.6 per cent of GDP.

How the hell is Portugal going to do this? This country suffers from (according to Wikipedia): balance of trade deficits, low productivity and a high debt of the private sector. Compulsory education is restricted to 14 years, so very little youngsters finish their secondary education.

If the country could reduce its budget deficit so easily to 5.9%, like it is planning for 2011, why did it not do this before the shit hit the fan? Because Portugal can’t! 

On April 20th I wrote in The European Union (2): Will there be a lost generation of youngsters in the EU ? about Portugal that the youth unemployment there is currently 23%. Don’t expect this generation of youngsters to reduce the budget deficit, to reduce the trade deficit and to increase productivity. So what will happen in the end is that the €78 billion is spent and the problems remained the same or got even worse, due to the higher debt and the higher interest payments.

Portugal is now committed to cutting the deficit to 3 per cent of GDP by 2013, a year later than envisaged under the government’s previous plan. 
Welcome to La-La Land…

In a second story the FT reports that from this €78 bln about €12 bln is meant to shore up the banks in Portugal:

More than 15 per cent of Portugal’s €78bn financial rescue package will be used to shore up the country’s banks, which will be required to increase their capital substantially over the next 18 months, according to sources close to the negotiations.
The sources said a total of €12bn had been earmarked for the financial sector under the terms of the bail-out agreement, which José Sócrates, Portugal’s caretaker prime minister, announced on Tuesday night. 
Under the programme, banks will be required to increase their core tier 1 capital ratios – a measure of financial strength – to 9 per cent this year and 10 per cent in 2012, according to the sources. Portugal’s central bank recently stipulated a target of 8 per cent for the end of 2011. 
Portuguese banks, virtually frozen out of capital markets because of successive downgrades of Portugal’s sovereign debt ratings, have become highly dependent on ECB funding over the past year.
The bail-out plan seeks to ensure they will have the financial strength and liquidity to finance the Portuguese economy, which is forecast to contract by 2 per cent this year.

Well, here finally the truth comes out. The Portuguese banks need to be shored up for €12 bln ($17.75 bln). The official story is that this money is needed to increase the core tier 1 capital ratios, in order to give the Portuguese banks the necessary strenght to fuel up the Portuguese economy. 

But the Portuguese economy is contracting by 2% this year. And in a contracting economy the need for capital is lesser than in a growing economy. And everybody with half a brain knows that it is useless to pump money in the economy – just for the sake of it – when there is:

  • High unemployment
  • High private-held debt already.
  • A bubble in residential real estate
  • No true drivers for jobs
  • No private initiatives in the industrial or the services sector that can fuel up the demand for labor.
  • A tourist industry that is more and more losing ground to the Turkish all-inclusive hotels and the destinations outside Europe that are still offered for bargain prices.

The real story is probably that large banks in countries like Germany, France, Britain and the UK invested heavy in Portuguese sovereign and bank bonds and want eventually to get their money back. Hence, this will the money of the EFSF that via Portugal will be forwarded to Barclays, BNP Paribas, Deutsche Bank, ING Bank. The Canadian website Global Research says this about it
We do not believe Americans and most of Europe understand the impact of the European banking crisis. The meeting in Athens next week to restructure Greek debt probably will trigger a EU-wide banking crisis, which we have been warning about for the past two years. We do not see Greeks, Irish or Portuguese living in poverty for the next 50 years just to make sure the bankers get their money back, which the bankers created out of thin air.  
Back to the article in the Financial Times:

Mr Sócrates, who is campaigning for re-election in a general election on June 5, stressed that the package would not involve any cuts in public sector wages or the minimum national wage, nor any dismissals of state workers.

This is also political blah-blah: Portugal has to cut 4% of GDP and nobody that is dependent on the government has to pay one cent for it? Mr. Spock of Star Trek would say: “welcome to Earth, stranger. May you live long and prosper”. I would say:”cut the crap”. 
However, details of the agreement emerging on Wednesday from sources familiar with the talks and in Portuguese media reports, included a special tax on pensions above €1,500 a month and a freeze in public sector pay and pensions until 2013. 
Unemployment benefits will not be paid for longer than 18 months (compared with three years currently) and will not exceed a maximum of €1,048 a month (down from €1,258). Big state infrastructure projects and public-private partnerships (PPPs) are to be suspended while their viability is reassessed. 
With 4% inflation in Portugal (according to Eurostat), a two year freeze of public sector pay and pensions means a diminishing purchase power for public sector workers of about 8-8.5% until 2013.

That is still much better than the 16.7% drop in Unemployment Benefits (not even including the halving of the duration of UB), exclusive the 8-8.5% for projected inflation. With this it seems that poverty lurks for a large generation of Portuguese citizens. And will these cutbacks solve the Portuguese and European financial problems? No, they won’t!

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