Portugal loses patience with Europe

by Ambrose Evans-Pritchard
Posted July 18th, 2011

 

AT LAST, SOME RAW EMOTIONAL GAULLISTE PATRIOTISM FROM THE VICTIMS of Europe’s Maquina Infernal? Portugal’s new premier Pedro Passos Coelho — a free marketeer — began to growl over the weekend. “We want to take part in an ambitious European project and make our contribution so Europe can confront its problems in the most ambitious way, but as prime minister I will not stand by and wait for Europe to govern Portugal,” he told the party faithful.

For Portuguese readers: “Nós queremos participar num projecto europeu ambicioso e queremos dar o nosso contributo para que a Europa saiba encontrar respostas mais ambiciosas para os problemas, mas como primeiro-ministro nunca ficarei à espera do que a Europa tenha que fazer para governar Portugal”

Please correct me if my loose translation is wrong.

So, it has begun: last week Greece’s premier George Papandreou launched two angry broadsides against EU magnates. How could he do otherwise after Eurogroup chair Jean-Claude Juncker told a German newspaper that Greece’s sovereignty would be “massively limited”?

“Massively limited?” Mr Juncker should be clamped in irons if he dares set foot on Greek soil. Now the leader of what is arguably Europe’s oldest nation state (foundation 868, under Vimara Peres) has shown the first hints of frustration.

Just to remind you: unemployment in Portugal is 12.4pc (youth: 28.1) and about to rise much further as the fiscal punch hits. The figures for Spain are 20.9pc (44.4), Greece 15pc (38.5), Ireland 14pc (26.5), Latvia 16.2pc (32.9). Yet the these countries are all facing further headwinds of fiscal and monetary tightening.

For a serving prime minister to make such remarks at this delicate juncture might be taken by some as a cloaked threat  to walk away from the EU project, if the country continues to be treated in a humiliating and damaging fashion. Mr Passos Coelho is fencing with a double-edged blade. Even to hint at misgivings over EMU is to set matters in motion. The markets were very quick to pick up on political body language during the ERM crisis in 1992. The Portuguese leader also said there was a “colossal” €2bn hole in the public accounts left by… well, somebody. He refrained from blaming the outgoing Socialists. They are needed to help pass laws in the Assembleia. Any other skeletons to be uncovered?

I have great sympathy for Mr Passos Coelho and for the Portuguese people. The German-led creditor states have treated the EMU crisis as if it were a morality tale, castigating Club Med and Ireland for alleged fecklessness. All that is required — goes the argument — is further austerity, a dose of 1930s wage and debt-deflation, and virtue will be its own reward. The Left-wing Bloco calls it “social terrorism”.

Adding injury to insult, Germany has insisted that Portugal, Greece, and Ireland pay a penal rate of interest some 200 to 300 basis point over the cost of funding paid by the EU’s bail-out machinery, though this may soon be cut somewhat. As former US Treasury Secretary Larry Summers said this morning in the pink sheet, such penal rates play havoc with debt dynamics and are driving a string of countries into insolvency and depression.

This Germanic view of events is self-serving and intellectually dishonest. Southern Europe is in trouble because Europe’s monetary union is and always was dysfunctional. The Maastricht process caused interest rates to plunge in the Club Med bloc, setting off credit booms. Portugal’s rates fell from 16pc to 3pc in short order.

The ECB poured further petrol on the fire by tilting monetary policy to German needs in the middle of the last decade, when Germany was in trouble. The ECB breached is own eurozone M3 and inflation targets for year after year. In the specific case of Portugal, the boom occurred earlier, in the late 1990s. No doubt a great many foolish errors were made in those halycon days. (I wrote about them at the time or shortly after, and was roundly reproached for my insolence).

Yet over the last eight years Portugal has been relatively frugal. It did not have an Irish banking bubble, or a Spanish property bubble. It did let social transfer costs creep up to 22pc of GDP — when they should have been falling — but it also passed a string of fiscal austerity packages. Yet at the end of the day it was punished anyway. It has failed to reap any worthwhile benefits. There has been no economic convergence or EMU catch-up effect. Productivity has remained stuck at 64pc of the core-EU average. Portugal switched from surplus on its external accounts in the early 1990s to a deficit of 109pc of GDP today.

Public and private debt has ballooned to 330pc of GDP, one of the highest in the world. Portugal will still have a current account deficit of almost 8pc this year and the budget deficit was still running at a 8.7pc rate in the first quarter. Such a profile two or three years into draconian cuts and demand compression is almost tragic. And now they must implement yet further austerity, without debt relief or offsetting monetary stimulus or devaluation. This policy is a near certain formula for economic asphyxiation..

In Portugal — as well as Greece, Ireland, and perhaps Spain in due course — we are moving closer to the point where national leaders must decide whether to satisfy EU demands, or placate their own citizens, for is it no longer possible to serve these two masters at the same time?

Can there really be any doubt as to the outcome of this tug-of-war

The Lying Liars of Luxembourg

by Justice Litle
Editorial Director, Taipan Publishing Group
Posted 11 May 2011

The finance ministers of the eurozone have explicit instructions: Lie through your teeth when necessary. This strategy may not hold up for much longer.

“When it becomes serious, you have to lie.“

Who might say the above in a public forum? The shame-faced CEO of Enron, perhaps. Or some shadowy architect of the Vietnam War era. Or Richard Nixon. The actual quote comes from Jean-Claude Juncker, the prime minister of Luxembourg. No one worries much about Luxembourg. But Mr. Juncker is also “the head of the Eurogroup council of eurozone finance ministers” (whatever that means, via The Wall Street Journal). He has held the job since 2005.

In saying “When it becomes serious, you have to lie,” Mr. Juncker was apparently talking about the serious conditions in the eurozone. The necessary lies – this time at least – were regarding the euro.

“Just before 6 p.m. [on Friday],” the WSJ reports, “German news magazine Spiegel Online distributed a report saying that eurozone finance ministers were convening a secret, emergency meeting in Luxembourg that evening to discuss a Greek demand to quit the eurozone.”

Reporters frantically phoned Mr. Juncker’s spokesman, Guy Schuller, to verify the “secret meeting” assertion Spiegel Online had made. The official word: No meeting. Even though there actually was one. “I was told to say there was no meeting,” Mr. Schuller told the WSJ. “We had certain necessities to consider… there was a very good reason to deny that the meeting was taking place.” It was “self-preservation,” Schuller added, speaking for his finance minister boss. The finance ministers could have instructed him to say, “Yes, we are meeting – but not about a Greek currency exit.”

Instead they just fibbed. And blamed it on the exigencies of the moment. Does this really matter? On one level, not really. “A prominent politician instructs his subordinate to lie… in other news, grass is green and water is wet.” On another level, though, the incident is very telling.

“When the matter is serious, you have to lie.” Mr. Juncker made that statement in April, on videotape, at a conference on economic governance. He further admits at the conference that he has “had to lie” before. And this man heads up all the finance ministers. Remind me again, as the eurozone lurches toward crisis, why in the world anyone listens to a bloody thing the European pols have to say?

Perhaps we would be better off listening to Finnish political leader Timo Soini, who wrote the following in an open letter to the WSJ, “Why I Don’t Support Europe’s Bailouts” (recently posted here on Quantum Pranx, and which bears repeating, over and over):

To understand the real nature and purpose of the bailouts, we first have to understand who really benefits from them. At the risk of being accused of populism, we’ll begin with the obvious: It is not the little guy who benefits. He is being milked and lied to in order to keep the insolvent system running. He is paid less and taxed more to provide the money needed to keep this Ponzi scheme going. Meanwhile, a symbiosis has developed between politicians and banks: Our political leaders borrow ever more money to pay off the banks, which return the favor by lending ever more money back to our governments.

In a true market economy, bad choices get penalized. Instead of accepting losses on unsound investments — which would have led to the probable collapse of some banks — it was decided to transfer the losses to taxpayers via loans, guarantees and opaque constructs such as the European Financial Stability Fund.

The money did not go to help indebted economies. It flowed through the European Central Bank and recipient states to the coffers of big banks and investment funds.

Further contrary to the official wisdom, the recipient states did not want such “help,” not this way. The natural option for them was to admit insolvency and let failed private lenders, wherever they were based, eat their losses. That was not to be. Ireland was forced to take the money. The same happened to Portugal.

Why did the Brussels-Frankfurt extortion racket force these countries to accept the money along with “recovery” plans that would inevitably fail? Because they needed to please the tax-guzzling banks, which might otherwise refuse to turn up at the next Spanish, Belgian, Italian or even French bond auction…

Ah! So it is all about the damn banks again. Same thing on both sides of the Atlantic.

But how could Mr. Soini dare speak so bluntly? Perhaps he didn’t get the Luxembourg “sometimes you have to lie” memo. Another man who speaks plainly is Reggie Middleton of the Boom Bust Blog (www.boombustblog.com), who foresees a “Lehman 2.0” scenario for Europe:

A key point is that the numbers from the EU and IMF have proven to be inaccurate over the entire crisis. Remember, right after all of the Irish banks passed the EU stress tests last year, two collapsed and had to be nationalised by the government. The greatest fear and the staunchest reality in the EU is this — the European Union based banks are loaded up on sovereign bonds and leveraged no less than 10:1 and more likely 30:1. Any significant haircut will totally wipe out their equity.

The dilemma is that several sovereign states will also need haircuts to continue as a going concern. A definite catch 22 dilemma! It gets worse, since one default will cause contagion to spread and the path of contagion is not highly predictable, hence no state is explicitly safe until this debt issue is rectified. The most realistic solution is to have the insolvent states restructure and get the pain over with.

That sounds pretty serious. No wonder they are lying through their teeth. But why does anyone still believe them? The Standard & Poor’s ratings agency no longer believes Greece at least. An S&P downgrade of Greek debt has pushed the price of Greek credit default swaps (the cost of insurance against risk of default) to record highs.

What this all means, ladies and gentlemen, is that the euro is a ticking time bomb of a currency. The U.S. dollar is in very bad shape, to be sure. But the political union of the United States is not on the verge of fragmenting and exploding. In Europe, you have the flat-out liars and the honest voices. Half the honest voices say a restructuring would be “devastating” for Greece (and the rest of the eurozone). The other half say that delaying the inevitable only makes the ultimate pain worse.

As we have long said in these pages, Europe is being held together with duct tape. The European sovereign debt crisis has been held at bay with impossible promises and thinly veiled lies for an extraordinary length of time now. We have had multiple close calls and near disasters already… at some point soon the real bomb may go off. The euro has risen sharply due to a laser-like focus on the easy-money policies of the Federal Reserve. Underlying political risk in the euro currency has been almost entirely ignored. But at some point, the lies will be tolerated no longer. We saw a violent preview of that just recently, when the euro fell sharply and the dollar surged.

If the euro continues to crack – or even heads into freefall – the rise in the USD will accelerate. Treasury bonds could catch a big bid too, confounding and perplexing all the long bond/USD permabears. This action would lead to another swift and brutal drop in the price of commodities, and possibly precious metals. Such a drop would make precious metals and the commodity complex a potential bargain buy later this summer, as a large hedge fund manager has predicted. But in the meantime, be warned.