Portugal Told to Make Deeper Deficit Cuts
Europe’s wealthy countries looked to Portugal to resolve the year-old euro debt crisis by coming up with “sustainable” deficit cuts to pave the way to an 80 billion-euro ($116 billion) bailout.
Confident that Portugal will be the last aid seeker, German Finance Minister Wolfgang Schaeuble pushed the feuding political parties in Lisbon to unite behind an austerity package in the thick of an election campaign.
“It’s up to Portugal to decide,” Schaeuble told reporters today at a meeting of European finance officials in Godollo, Hungary. Portugal “has to deliver sustainable measures for reducing the deficit.”
Finnish Finance Minister Jyrki Katainen, a candidate for prime minister, said Portugal must enact deficit cuts that go beyond the measures rejected last month in parliament.
“The package must be really strict because otherwise it doesn’t make any sense,” Katainen said yesterday. “The package must be harder and more comprehensive than the one the parliament voted against.”
Portugal needs deeper cuts than what the Portuguese government just rejected. Good luck with that.
Europe’s Measures Show No Sign of Working
The New York Times reports In Portugal Crisis, Worries on Europe’s ‘Debt Trap’
For the third time in a year the European Union is going through the same ritual, bailing out another insolvent country. Portugal now follows Greece and Ireland to the European welfare office to ask for new loans on the condition of ever more drastic spending cuts.
So far the markets have taken Europe’s third successive sovereign financial crisis in stride. But many economists are a good deal more alarmed, most notably because the bailout formula European leaders keep applying to their most indebted member nations shows no signs of working.
Greece, Ireland and now almost certainly Portugal have access to hundreds of billions of dollars in emergency European aid to help them avoid defaulting on their debt. But the aid is really just more loans, and the interest rates the countries are paying, if a little lower than what the private market would charge, are still crushingly high. Their pile of debt gets bigger with every passing day.
Moreover, the price of these loans has been a commitment to slash government spending far more drastically than domestic leaders would have the desire or the political power to accomplish on their own. And for countries that depend a good deal on government spending to generate growth, rapid decreases in spending have meant sustained economic stagnation or outright recession, making every dollar of debt that much harder to pay back.
Economists call this “the debt trap.” Escape from the trap generally requires devaluation of the currency, which cannot happen among countries that use the euro as their common currency, or strong economic growth, which none of the three have, or some kind of bankruptcy process, which all three forswear. Add to that the likelihood that all three countries will continue to have unstable governments until they figure a way out, and Europe’s financial crisis has no end in sight.
“What has been missing, in the debate about how countries can restore their finances to some kind of sustainability, is the limit of how much they can cut in a period of austerity,” said Simon Tilford, chief economist for the Center for European Reform in London. “There is a limit of how much any government can cut back spending and survive politically unless there is a light at the end of the tunnel, a route back to economic growth.”
The crisis in Portugal also raises new questions about whether the European Union will come to grips with the other side of its crisis: the banks. Banks in well-off countries like Germany, France and the Netherlands, as well as Britain, hold a lot of Greek, Portuguese and Irish debt. And if these countries cannot pay their debts, they would have to reschedule them, reduce them or default, causing a major banking crisis in the rest of Europe.
That reckoning would require governments to ask their taxpayers to recapitalize the banks, which is exactly what political leaders are afraid to do.
How Long will Greek, Spanish, Irish, Portuguese Taxpayers Put Up With This?
The article goes on to say something that I have been saying for over a year: Taxpayers of Greece, Ireland and Portugal are bailing out German, French and British taxpayers and depositors — not the other way around.
The indebted countries are not really getting bailouts, Tilford said, “but loans at high interest rates.”
The question is how long will taxpayers in Greece, Portugal, Ireland, and Spain put up with this? Notice that I included Spain.
Spain may not need a bailout now, but it will. And Trichet’s One Size Fits Germany Policy cannot possibly help.
For additional details on European rate hikes, Trichet’s policy, and a discussion on Factors affecting currencies please see …
- Trichet Hikes, Two More Expected; Bank of England Holds; Fundamental Factors Affecting Currencies; Is Trichet’s Move the Right Move?
- “One Size Fits Germany” Policy.
Mike “Mish” Shedlock
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