Tag Archives: Portugal

Italy, the ESB and Europe’s Populist Fantasyland, by Daniel Lacalle

There is no law that says a government has to live beyond its means and go into debt, even though that’s what most of them do. From Daniel Lacalle at dlacalle.com:

The populist coalition in Italy has presented an “economic” program and a threat to the European Union that makes Greece look like a walk in the park.

Let us start with reality.

Italy’s economic problems are self-inflicted, not due to the Euro.

  • Italy has seen more governments since World War II than any other country in the European Union.
  • Governments of all colors have consistently promoted inefficient dinosaur “national champions” and state-owned semi-ministerial corporations at the expense of small and medium enterprises, competitiveness and growth.
  • Labor market rigidities remained, leaving high unemployment and differences between regions.
  • A perverse incentive financial system, where banks were incentivized to lend to obsolete and indebted state-owned companies in their disastrous empire-building acquisitions, inefficient municipalities, as well as finance bloated local and national government spending. This led to the highest Non-Performing Loan figure in Europe.
  • A nightmare legal system that makes it virtually impossible to repossess assets from bad debt, led non-performing loans through the roof and malinvestment to soar.
  • A thriving export and small enterprise ecosystem were constantly limited by taxation and bureaucracy. This made the thriving companies smaller and actively looking to set activities outside of Italy.

Because of this, government spending continued to rise well above revenues. As Italy -like Spain and Portugal- decided to penalize high-productivity sectors with rising taxes, revenues fell short, while expenditures continued to rise. Italy, like so many peripheral countries, created a massive “crowding out” effect of the public sector against the private. It is not a coincidence that most citizens in Italy, like Spain or Portugal, prefer to be civil servants than entrepreneurs.

It is no wonder that, while private companies managed to survive and improve “despite government”, debt and non-performing loans soared.

Now they blame the Euro. As if the same crowding out would not have happened outside.  The only difference is that outside the Euro the government would have destroyed savers and citizens through constant “competitive devaluations” that were the cause of the economic weaknesses of the past. Constant devaluations did not make Italy, Spain or Portugal more competitive, they made them perennially poor and perpetuated their imbalances.

To continue reading: Italy, the ESB and Europe’s Populist Fantasyland

 

Did Germany Just Blink? by Don Quijones

It appears that Germany’s going to go a lot easier on Spain and Portugal than it did with Greece. Is Brexit forcing Germany to play nice? From Don Quijones at wolfstreet.com:

So who’s going to bail out the banks?

A most unusual thing happened in Europe this week. In a rare climb down, Angela Merkel’s government decided not to push the European Commission to impose a punitive fine on Portugal and Spain for their persistent failure to comply with their budget deficit targets, leading one Eurogroup minister to declare that the euro zone’s Stability Pact is “dead.”

Of Europe’s 27 commissioners, only four voted in favor of applying the fines; the other 23 voted against. According to El País, the deciding factor in the decision was an impromptu phone call from German finance minister Wolfgang Schäuble to some of the more conservative commissioners, giving them the green light to forego the fine.

The U-turn offers Spanish and Portuguese taxpayers a brief but welcome respite from Troika-enforced fauxterity. As we previously pointed out, if the Commission had imposed the fine, it would not have been paid by the politicians who failed to play by the rules agreed upon in Brussels; it would have been paid by the citizenry who are already suffering the consequences of the recession that helped cause the deficits.

But does this rare act of benevolence from Germany represent a genuine shift in policy toward the Eurozone’s Club Med members or is it merely an act of political expedience?

Naturally, Schäuble and Juncker would much prefer Mariano Rajoy, a man cut from pretty much the same ideological cloth as themselves, to stay in power. Spain has been an important ally of Germany under Rajoy’s charge and the support of his party was essential in propelling Juncker into the European Commission’s top spot. What’s more, if Rajoy does eventually form a government, a new round of pre-ordained fauxterity will quickly kick in.

But there are also signs that Germany may be beginning to marginally soften its stance on austerity, prompting rating agency Fitch to lament Europe’s abandonment, once again, of fiscal discipline and economic reforms.

Merkel’s government seems to have realized that for the European project to have any kind of future in a post-Brexit world, it will have to offer a little more carrot and a little less stick. If it doesn’t, the single currency that enables German manufacturers to export at a discount rate all over the world will eventually crumble under the weight of its own contradictions.

“The problem is this,” warns U.S. rating agency Standard & Poor. “The EU, as it is currently constructed and operates, doesn’t embody a coherent ‘pooling’ of the various dimensions of nation-state sovereignty, and therefore it’s unsustainable in its current form.”

Put simply, the EU is a half-way house with too much democracy and nothing in the way of transfer union.

“There are too many moving parts in the electoral politics of 28 nation states, and too many conceivable random-like events that could push political and economic developments in one direction or another, with impossible-to-predict consequences and timelines,” the agency added.

The perfect case in point is Italy’s banking crisis. If the country’s struggling banks are not saved with a combination of public and private money — a process that, to all intents and purposes, began on Friday with the announcement of Monte dei Paschi’s suspension of the ECB’s stress test as well as a €5 billion capital expansion later this year — the resulting carnage could unleash not only a tsunami of financial contagion but also an unstoppable groundswell of political opposition to the EU.

To continue reading: Did Germany Just Blink?

Portugal’s Bank Bail-In Sets a Dangerous Precedent, by Mark Gilbert

From Mark Gilbert at bloombergview.com:

As Europe belatedly gets around to repairing its weakest banks, investors who have lent to financial institutions by buying bonds face a brave new world. Their money can effectively be confiscated to plug balance-sheet holes. Recent events in Portugal suggest that the authorities should be wary of treating bondholders as piggybanks, or risk destroying a key source of future funds for the finance industry.

Let’s begin with the “what” before we get to the “why.” Here’s what happened to the prices of five Portuguese bank bonds in the past few days:

Picture the scene. You left the office on Dec. 29 owning Portuguese bank debt that was trading at about 94 percent of face value. In less than 24 hours, you lost 80 percent of your money. So what happened?

To continue reading: Portugal’s Bank Bail-In Sets a Dangerous Precedent

 

Telling Details, by Robert Gore

Writers are advised to avoid descriptions that read like catalogs, and instead use a few telling details that convey to the reader the essence of what’s being described. In the same vein, a few details may be all that’s necessary to understand the global economy and where it’s headed.

Detail one: the government of Portugal recently issued 12-month debt at a negative interest rate (“The Mad Euro Project Just Got A Lot Madder,” by Don Quijones). Detail two: the Chinese producer price index (PPI) has fallen for 44 straight months (“The Great Fall Of China Started At Least 4 Years Ago,” by Raúl Ilargi Meijer). Detail three: the so-called FANG stocks—Facebook, Amazon, Netflix, and Google—have accounted for the S&P 500’s entire 1 percent gain this year (as of November 20). Their market capitalizations have gone up 60 percent versus a combined increase in earnings of 13 percent. Without those four, the S&P is down 2.5 percent (“When Wall Street Gets DeFANGed———Look Out Below!” by David Stockman).

It is a truism of human psychology that a dollar today is worth more to us than a dollar in the future. To be induced to give up a dollar today, we need to be paid more than a dollar in the future. That premium is interest, and the psychological truism implies that it will always be at a positive rate. How then is Portugal able to borrow money and repay less than the amount it’s borrowing twelve months hence? It’s like seeing water run uphill.

There is an economic cult that infests central banks and believes, against all evidence, that debt powers economies and that by manipulating interest rates, economies can be manipulated. Press interest rates low enough and the economy will flourish. Businesses will borrow and invest in new productive capacity and jobs. Consumers will head to the malls. Speculators will bid up the price of financial assets and higher balances on brokerage statements will prompt more spending and investment.

It doesn’t work. While a lower interest rate may prompt an immediate increase in business borrowing, over time markets adjust to the new rate and the prevailing rate of return equilibrates to that rate. The last six years have demonstrated that taking central bank-administered rates to zero does not promote economic expansion, especially for developed world economies already overly indebted and plagued by governments addicted to economic intervention and welfare-state spending. But central bankers are like the medieval “doctors” who bled their patients to death. Having taken rates to zero they’re prescribing more leaches: negative rates. Mario Draghi, head of the European Central Bank, pledges to buy debt at negative yields. Speculators front run his pledge, buying an idiot’s ticket to ruin knowing a bigger idiot will pay a higher price. And Portugal, whose dire financials would merit double-digit interest rates in rational credit markets, gets paid to borrow.

Detail two: China joined a global debt binge after the financial crisis of 2007-2009. Debt funded booms in domestic consumption and investment in infrastructure, factories, houses, apartments, malls, and entire cities. Debt in the US and Europe funded their consumption of Chinese exports. China recycled the proceeds from its trade surpluses back into the debt of its customers—vendor financing.

China’s PPI deflation started in March 2012: producer demand shifted downward relative to supply, taking prices with it. Debt was producing diminishing returns and debt service was exacting an increasing toll on its economy. China’s “solution” has been more leaches: more debt. Chinese government statisticians dutifully count each new factory, apartment complex, and addition to infrastructure in their GDP tally. However, new facilities operate at a loss, apartments join hundreds of thousands across the country standing vacant, few cars are seen on many of the brand new roads and bridges, and some of the new cities are virtually uninhabited. China’s string of negative PPI readings offers a preview for the global economy: deflation and debt contraction.

Speculation and the rise of financial asset prices are not indicators of economic vitality. Rather, speculation is the last economic activity in which debt has produced a positive return. Negative interest rates imply that the prevailing rate of return could go negative: borrowing money to fund investments that lose money! That prospect may seem fanciful, but speculation is close to it, bearing a hugely disproportionate probability of loss.

Corporate managers are spending more on share repurchases—speculating on their corporation’s stock price—than their corporations’ free cash flow. There is a self-serving element to this. A significant share of executive compensation is stock options, but another consideration has been overlooked. Managers face a dearth of productive investments. Years of cheap debt have already funded most plausible capital projects. Commodities, intermediate, and finished goods markets are glutted and prices are falling. Debt, welfare state spending, and regulation have slowed many economies to a crawl, and put some of them in reverse. In what are managers supposed to invest? Might as well take a flier on the stock market; the potential gain of a gamble is better than a certain loss.

Detail three: capital is being destroyed or is fleeing glutted industries with burdensome debt and negative rates of return. Those characterizations apply to an ever-expanding swath of the overall economy, and are moving up the production chain from raw materials to transportation services, intermediate and finished goods, and retail. It is only a matter of time before they spread to services. The progression has been reflected in the stock market, where gains are confined to an ever shrinking number of stocks.

Investors have crowded into Facebook, Amazon, Netflix, and Google because they are among the few companies that continue to show increased profits; exemplars in a sector—high technology—that many investors hope is immune from the forces of economics. However, on a trailing twelve months basis, their price to earnings ratio is an unweighted average of 356.88, dragged down by Google’s “meager” 31.89 (all figures from Yahoo Finance). The FANG companies are wonders to behold, but their S&P-supporting valuations say nothing about the economy. They are instead an indication that, in David Stockman’s words, “[T]he gamblers are piling on the last train out of the station.” No company, not even the FANGs, are immune from the forces of economics; they are much better shorts than longs here.

Negative interest rates, glutted product markets, falling prices, shrinking global trade, plunging shipping rates, fading retail activity, and the desperate, manic piling into the FANG stocks say volumes about the economy. Winter is coming, and like the Game of Thrones version, it will be years before spring follows.

WHAT IS GREATNESS? WHY DO SO MANY

SETTLE FOR SO MUCH LESS?

TGP_photo 2 FB

AMAZON

KINDLE

NOOK

The Mad Euro Project Just Got A Lot Madder, by Don Quijones

A country, Portugal, with debt in excess of five times is GDP is borrowing at negative interest rates. Insanity is the right term for it. From Don Quijones at wolfstreet.com:

Feeding a Monstrous Pile of Debt.

Under Mario Draghi’s radical stewardship, the ECB seems determined to push the limits of monetary experimentation. And by all accounts, it’s succeeding.

This week saw numerous eurozone governments sell bonds at negative rates, an economic anomaly that has no place in a rational world. Even some mainstream economists still seem confused by it. Unfortunately, thanks to the tireless efforts of central bankers around the globe, we stopped living in a rational world a long time ago.

Feeding a Monstrous Pile of Debt

The latest government to enjoy the perks of negative-interest-rate living is Portugal. That’s right, Portugal, a country that four years ago was selling 12-month notes with an average yield of 6% amidst fears about the government’s ability to service its monstrous debt pile, is now able to sell €1.1b billion of 12-month debt at a -0.06% yield. In other words, if investors hold the bonds to maturity they will actually pay the Portuguese government – a government that doesn’t yet exist – for the privilege of holding its debt.

This is despite the fact that Portugal has not only a perpetually stagnating economy but also one of the highest debt-to-GDP ratios in the world. After four years of so-called “austerity,” Portugal’s combined public and private debt is now a mind-blowing 530% of GDP, with total corporate debt expected to reach 240% of GDP.

Most of the country’s public debt is foreign owned, and while there aren’t any reliable figures on who exactly owns the private debt, it is a fair bet that it is also mainly foreigners (and, of course, local banks). In other words, the country’s heavily-levered corporate sector is sitting upon the granddaddy of tick-tocking debt time bombs.

To continue reading: The Mad Euro Project Just Got A Lot Madder

Is the Troika About to Lose Control of South-Western Europe? by Don Quijones

From Don Quijones at wolfstreet.com:

The Price of  “Austerity”

Passos Coelho, who was until Tuesday Prime Minister of Portugal, knew “what to do.” After signing along the dotted line for a €78 billion bailout he embraced the Troika’s austerity agenda with abandon. Public spending was slashed, taxes were hiked, wages were cut, and a whole gamut of public assets and services were privatized.

As they say in Brussels these days, no pain, no gain. After four years of excruciating belt-tightening, Portugal was apparently back on the mend, despite its public debt almost doubling since 2008. Its economy had been through the grinder but it had come out the other end in much leaner shape. The public deficit had shrunk from 11% in 2011 to 3% today.

Unemployment had also fallen, and kept falling month after month, to the point where it was getting monotonous. Until two months ago, that is, when it shot back up over 14%. Then came the bomb shell: the country’s Ministry of Statistics announced in a rare moment of candor that unemployment, in an “extended sense,” was actually around 22%. As Deutsche Welle reports, the Portuguese government had been doctoring the figures to keep the European institutions (i.e. the Troika) happy:

European politicians prefer lower unemployment figures rather than higher ones, and as a consequence, there are now unemployment figures in “narrower” and “extended” senses. Mostly, the headline figures reported are the lower, “narrower” ones.

Flimsy Façade

In other words, in the real world Portugal has almost identical depression-era levels of unemployment as Spain. Its government is just more skilled at masking the grimness of its economic reality.

However, hiding a decidedly grim reality with a flimsy façade of doctored numbers may work on international investors and rating agencies – at least for a while – but it doesn’t work on those who have to live in that grim reality. And at election time that can be a serious setback.

When Coelho’s governing coalition received only 38% of the vote in last month’s elections, the game was as good as up, especially when it became clear that three parties on the left — the so-called “triple left” — had won an absolute majority and seemed willing to form a coalition.

Even when the Portuguese President Cavaco Silva, a former member of Coehlo’s pro-Euro party, reappointed Coehlo as prime-minister in a desperate bid to prevent “anti-European,” “anti-Nato” forces from winning the keys to government, he merely forestalled the inevitable. Today the inevitable happened: the “triple left” roundly rejected Coelho’s policy proposals, forcing Portugal’s Troika-friendly government to resign.

To continue reading: Is the Troika About to Lose Control of South-Western Europe?

Black Swan Lands In Portugal As Socialists Move To Overthrow Government, by Tyler Durden

Here we go again? First it was Greece; is it Portugal’s turn now? Stay tuned for more thrills and spills in Europe. From Tyler Durden at zerohedge.com:

Late last month we highlighted to reappointment of Portuguese PM Pedro Passos Coelho, noting that, in the words of Communist leader Jerónimo de Sousa, the President’s move to ignore the left’s attempt to form a government in the wake of largely inconclusive elections may be a “manifest waste of time.”

As FT put it a few weeks back, “no government on the left or right [can] hope to survive without support from the PS, which won 32.3 per cent [in October]” which means President Anibal Cavaco Silva might have made a mistake in propping up Coelho as the PM’s restoration will only serve to embolden an already angry left coalition.

Well sure enough, socialist leader Antonio Costa has now “formalized” plans to unite with the Left Bloc and Communists in order to reject the Coelho government. Here’s Bloomberg:

Portugal’s Socialists approved a plan to join forces with three other parties and oust Prime Minister Pedro Passos Coelho’s administration, raising the prospect of a new government committed to speeding the reversal of spending cuts tied to the country’s international bailout.

The Socialist-led program “is clearly less market-friendly than the one of the incumbent government,” analysts at the Royal Bank of Scotland Group Plc in London, including Clement Mary-Dauphin, said.

The Coelho government will fall if the Socialists and their allies close ranks and guarantee a majority in parliament to reject the program in a vote scheduled for Tuesday. President Anibal Cavaco Silva, who has the power to name prime ministers, would then decide if he’ll ask Costa to form a coalition. Parliament can’t be dissolved less than six months after it’s elected, meaning Cavaco Silva doesn’t have the option of calling fresh elections.

“The conditions are in place to form a Socialist Party government supported by a majority in parliament,” the party said in a statement e-mailed early on Monday. The Socialist government can be “stable” and last for a full term, it said.

Well, it can probably be “stable” domestically, but don’t think for a second that Brussels and Berlin are going to put up with this.

After all, the whole point of putting Alexis Tsipras through round after round of “mental waterboarding” over the summer was to discourage any Syriza sympathizers from attempting to use a euro exit (i.e. proving that the EMU is in fact “dissoluble” despite the protestations of many a eurocrat) as a bargaining chip on the way to negotiating for debt relief. As we put it, “the real question is whether or not the ATM lines, empty shelves, and gas station queues in Greece have had their intended psychological effect on Spanish (and Portuguese) voters. In other words, the question is whether the troika has succeeded in undercutting the democratic process outside of Greece by indirectly strong-arming the electorate.”

To continue reading: Black Swan Lands In Portugal

Portugal’s Debts Are (Also) Unsustainable, from Eric Matias Tavares

SLL tries to prepare its readers for tomorrow’s crises today. Here’s a lengthy but astute article that will get you up to speed on the next European debt crisis: Portugal. Fro Eric Matias Tavares, of Sinclair & Co., via zerohedge.com:

Portugal’s Debts Are (Also) Unsustainable

Everyone seems to be focusing on Greece these days – a country so indebted that it needs even more loans to repay just a fraction of its gigantic credits. Clearly this is unsustainable and something has to give. Even the IMF agrees.

But what about the other Southern European countries?

Actually, Portugal’s financial situation is looking particularly shaky, and any hiccups could have serious cross-border repercussions from Madrid all the way to Berlin.

The prevailing narrative is that Portugal has been a star pupil compared to Greece, with austerity delivering much better results:

• The government, a coalition of a center party and center-right party that together have held the majority of parliamentary seats since the 2011 election, pretty much followed all the major guidelines demanded by its creditors (the famous “Troika”) pursuant to the 2010 bailout, and was even praised for it.

• Exports have performed exceedingly well given everything that was going on domestically and abroad; the managers of small and medium enterprises in Portugal are true heroes, operating in difficult conditions and with limited access to credit.

• Portugal has recently become a darling of international real estate investors and tourists.

• The country’s citizens have stoically endured a range of tough austerity measures with surprisingly little social disruption.

So it is understandable that hopes for Portugal’s future are much rosier than in Greece… AND YET ITS FINANCIAL SITUATION IS ALSO UNSUSTAINABLE!

We realize that this is quite a bold statement. So to support our argument we will use some simple math to show where government finances stand after five years of austerity.

Simple Math, Hard Truths

The Bank of Portugal (“BdP”), Portugal’s central bank, publishes debt statistics of key sectors in the economy on a quarterly basis. The link to the latest publication can be found here.

As of March 2015, non-financial public sector debt stood at €288 billion, or 166% of GDP. You may think that there’s something odd right there because you are used to hearing that the Portuguese government “only” owes 130% of its GDP. That’s because the media generally uses Maastricht treaty calculations, not the total amount that the government owes as a whole (which includes public companies, for instance). But what’s 36 percentage points of GDP among friends?

OK, let’s do some math:

• We start by dividing €288 billion by 166% to find out what nominal GDP the BdP used in its calculation: about €174 billion;

• Next, let’s assume that the cost of debt on all that government debt is only 1%. In this case, the annual interest expense for the government should be 1% x €2.88 billion, or €2.88 billion. We know that this is very low as the actual interest expense in 2014 was almost €7 billion (and likely not all of it, but government accounts can get quite murky);

• Then we assume that Portugal’s nominal GDP grows at 1%, which is not stellar but certainly better than recent years – from December 2011 to December 2014, the average nominal growth rate was actually -0.6% (BdP figures). So that’s 1% x €174 billion, or €1.74 billion;

• Finally, we compare the assumed interest costs with the nominal GDP growth: €2.88 billion vs €1.74 billion.

See what we are getting at here?

USING FAIRLY OPTIMISTIC ASSUMPTIONS, THE PORTUGUESE ECONOMY IS UNABLE TO GROW ENOUGH TO COVER THE INTEREST ON ITS GOVERNMENT DEBTS, LET ALONE AFFORD ANY PRINCIPAL REPAYMENTS!

As a result, government debt-to-GDP can only rise from here, especially as the government seems incapable of balancing the books.

To continue reading: Portugal’s Debts Are (Also) Unsustainable