Do not let Portugal and Spain become another Greece as they are all getting very near to a lost decade

9th February 2012 by Shaun Richards

The saga that is Greece resembles what is called car-crash television more and more each day. After yet more promises of a deal yesterday it turned out that instead we got groundhog day and no deal. However I wish to be clear that there are alternatives which involve a better way and that I have recommended them in past posts. The mainstream media tries to dismiss them and uses a barrage of pejorative words such as “disorderly” to try to cover up reality. Let me illustrate my case with a quote from last nights discussions as Bloomberg published the draft report.

The draft showed a contraction of between 4 percent and 5 percent this year, due in part to a worsening external environment, compared to a forecast of a 3 percent drop in output, contained in a Dec. report on the country by the IMF.

This keeps happening where the current policies are supported by ridiculously optimistic forecasts by both official bodies and the media. It was only on the 26th of January that the BBC’s Stephanomics blog told us that Greece had achieved a primary deficit surplus for example and I discussed the reality of the figures for January yesterday. Last night’s draft repeated such a theme.

 will help Greece return to growth in the first half of next year, according to the document.

That is a message we have heard before as Lady Gaga comments below.

Again and again
Again, again, again, again
Never stop again and again
Again, again, a-a-again, again
Never stop, oh

The problem is that these rose-tinted assertions wither without blooming and it is time for some of those responsible to be named and shamed as they have contributed to Greece’s decline. Their misrepresentations have contributed to many feeling that “something terribly  bad” would happen if Greece defaulted and devalued as I have suggested whilst the truth that the current strategy is leading them to penury is hidden.

However the dangers are not confined to Greece and I wish to look at the potential for them to spread to the Iberian peninsular. Back on the 17th and 27th of January I discussed my fears for the way that Spain and Portugal were following a path that has been trod by Greece and as I have highlighted above we know where that goes.


Let us start with the country that is most looking like Greece-lite which is Portugal. Her situation is expressed in many ways  by two simple statistics which are her inflation rate of 3.62% and her unemployment rate of 12.4%. It is the combination of inflation above target and high unemployment that signals a change here. Adding in the latest annualised economic growth figure of -1.7% only adds to the unease.

New orders in industry

From her statistics institute. 

For the quarter ended in December 2011, industry new orders year-on-year change rate was -11.1% (-8.0% in the previous month). External market new orders decreased 14.6% in December (9.6% in November) while the year-on year change rate of the domestic market index was -6.4% (-6.0% in the previous month).

If you look back at the past series of this index you see the story of 2011. The base level is set at 100 for 2005 and March 2011 saw some optimism as the monthly index rose to 132.9. However if we ignore August where there was a calamitous drop we have declined since then to 103.5 in December with much of the fall being in the most recent months. If I am translating the Portuguese correctly the domestic component reads 69.

What about current industrial output?

Again from the national statistics index.

In December, the nominal year-on-year change rate of Industry Turnover Index was -5.5% (2.0% in November), determined by a 10.6% decrease in sales for the domestic market (decrease of 6.8% in November). Sales for the external market rose by 4.4% (17.0% in the previous month).

In the 4th quarter 2011 industry turnover index grew, in year-on-year terms, 0.3% (growth of 3.5% in the previous quarter). For the whole year of 2011, the industry turnover index grew 4.8% (increase of 10.5% in 2010).

Also in year-on-year terms, employment, wages and salaries and hours worked, adjusted for calendar effects, decreased by 2.3%, 4.5% and 3.3%, respectively.

I have split them up because I think we learn from this report in three stages. Firstly the monthly numbers show a near collapse in domestic demand and a fall in the previously healthy export sector. If we remember that monthly figures can mislead we see quarterly numbers showing a considerable downturn too and then the numbers get backed up by falls in wages and salaries.

For those who find the underlying index helpful well it is 100.1 on a base level of 100 for 2005 which is rather eloquent I feel. Not quite a “lost decade” yet but it may well be on its way.


Industrial Production

From her national statistics institute.

The interannual variation of the Industrial Production Index for the month of December is –6.9%, one tenth above that registered in November.By economic destination of the goods,all sectors present negative interannual rates

Industrial production decreases 1.8% in the year 2011, as compared with 2010.

Rather ominously those headline and indeed the annual numbers look worse for Spain than the Portuguese ones analysed above.  The heaviest faller over 2011 was capital goods which fell by 10.8% and they were particularly weak in November and December. If we look at the underlying index we see that it is at 73.9 but comparisons with the past are not so clear as it was re-based at 100 in 2009. However by analysing back data I can tell you that December 2005 had a reading of 94.6 and to find a lower reading in December I have had to go back to 1993.

The national statistics institute tells us that there were more public holidays in December this year andso the index has a seasonally adjusted annual drop of 3.7%. However if you look at comparisons with the past as I have done above it doesn’t make that much of a difference. Oh, and remember how the extra bank holiday in the UK for the Royal Wedding became one of those oddly declining situations over time as in extra economic growth, later growth, er no growth at all?


Adding this latest data to my previous updates on Portugal and Spain just makes me more and more concerned that they are following Greece on a path that as Talking Heads put it.

 We’re on a road to nowhere

rather than the claimed

We’re on the road to paradise

Putting this more strictly we see the following. The Euro zone internal devaluation method of achieving competitiveness has not worked in Greece and it is showing signs of not working in Portugal or Spain either. This should not be a surprise as austerity and wage cuts (internal devaluation) always needed a better international outlook to stand a chance. It needs help from a combination of currency devaluation and debt haircuts with the mixture varying from country to country. Otherwise events will continue in this grim pattern of over optimism followed by disappointment followed by real economic distress and echoes of the 1930s for the countries involved.

Another example of this has come from Greece’s statistics agency as I have been writing this article.

Unemployment rate in November 2011 was 20.9% compared to 13.9% in November 2010 and 18.2% in October 2011…… Unemployed increased by 337,010 persons (a 48.7% rate of increase) compared with November 2010 and by 126,062 persons compared with October 2011 (a 14.0% rate of increase).

Bank of England and European Central Bank

It is often difficult predicting monthly moves by central banks although,these days, my monthly profit and loss does not depend on it as it sometimes used too! So I can tell you that I expect the Bank of England to increase its Quantitative Easing operation by £50 billion but that there is a chance of it waiting until next month. I suspect we were being softened up a little by an article in the Financial Times by Gavin Davies which had the rather presumptive title of “is QE still working”.

Actually his article boils down to this bit.

real GDP in the UK may have been boosted by about 1.5 per cent, while that in the US may have risen by 0.6-3.0 per cent

As I have pointed out in a comment to it, count the mays…..

As to the ECB it may mull an interest-rate cut but I think that it is more likely to bathe in the perceived success of its recent (market-manipulating) actions and wait for its second effort at this (another 3 year money market offer) later this month before acting.


13 thoughts on “Do not let Portugal and Spain become another Greece as they are all getting very near to a lost decade”

  1. JW says:

    Hi Shaun
    I agree with your ‘microscope’ being directed at Iberia. I think if ( and admittedly its a big ‘if’) the Italians manage to pay a little more of the tax they should be paying, Italy should limp along OK. Its a ‘rich’ country fundamentally. Ireland as you have discussed is a bit ‘special’.
    Portugal is definitely going down the Greek route, and the EZ cannot apply a ‘Greek’ solution, because the majority of Portugese Bonds are written under English Law with all the protections for creditors that this entails. Personally I think its a case of ‘when’ rather than ‘if’ Portugal leaves the EZ, I cannot see another solution, unless the majority of the population descends into peasantry.
    Spain’s predominant problem is the construction overhang and the consequential debts. Again the equation is fairly simple, do the financial and corporate owners of the debt go bankrupt, or does the government aided by the EZ ‘socialise’ the debt and therefore zombify the population and economy for a decade or more. I fear the answer is clear on present policies, it will be the later.
    We see this played out in ‘technicolour’ in the EZ , but the same is happening everywhere in the West/Japan. Multi-national corporates don’t care about national economies, labour costs will be driven down to the lowest common denominator. The policies of QE , ZIRP, zombification of banks, only helps this process. Wealth in the hands of few is protected at the increasing cost of the majority. Marx was correct in many ways, and so were many other ‘thinkers’ of the 19th century such as Bageholt. The need to stop a ‘catastrophic’ breakdown of the financial markets in 2008 was correct, but the endless continuation of protecting the ‘bankrupt’ is creating a very unbalanced world. 

  2. Anonymous says:

    Hi Shaun
    Thank you for another stimulating post. It is right to consider the debtor country and what’s best for her.Greece at present seeks a negotiated solution. I think also one needs to consider creditors, including Greek banks and pension funds. In the alternative scenario where Greece pursues a course of default without agreement of its bondholders and necessarily the Troika what could be the consequences? I have read of distinctions being made between bonds defined a) under Greek local law b) under UK law with Collective Action Clauses. Aside from the contagions leading from events of default ( implied by your preferred course), there could be huge implications for sovereign bonds held under UK law. As Greece forms the precedent for those periphery countries who will immediately line up to negotiate their own haircuts, if Greek insolvency is mishandled the conscertina-effect could define generations to come.

    1. Anonymous says:

      Hi Shire

      I agree that there is scope for things to go wrong. But the truth is that we have been on the wrong course for a while. An example of this is the European Central Banks Securities Markets Programme with its 219 billion Euros of peripheral bonds that nobody else wanted to buy. One could go on and on..

      Accordingly a declared and orderly default has to my mind fewer risks than carrying on as now as the ruses required to keep Greece on course are likely to deter buyers of government bonds in other countries that hit or are already in trouble. It is just another part of my unstable lifeboat.

      Yes there will be casualties in an economic sense but the delays are increasing and not reducing them.

  3. Ian_jones says:

    Finally the media are waking up to the fact that QE is not cost free. It simply redistributes the costs of the crash and QE makes sure it hits pensioners and future pensions very hard. Pension funds buy gilts and receive income on other debt based investments such as mortgages. QE is simply robbing future income streams to bail out current debtors and the banks who continue to pay billions in bonuses!

    1. Anonymous says:

      Hi Ian

      It has taken a while has it not? And yet so many of these self-proclaimed experts have missed other vital elements such as the problems of an exit strategy. For example the Bank of England holds over £4 billion of a gilt which expires in 2060….

      Gavin Davies did not mention this at all in his FT article.

  4. Robert Silver says:


    Since there’s just one more bank holiday in the U.K. this year, does that mean that that quarters figures will be skewed dramatically?!  Of course not.  Perhaps one day, the ONS will employ statisticians who know what they’re doing, as I’m afraid, I for one, have lost a lot of faith in their abilities over the last 3-4 years.


    1. Anonymous says:

      Hi Robert

      I suspect that I will be watching the Spanish numbers all year and have made a mental note to see how the seasonal adjustment discussed above works out….

  5. Anonymous says:

    ‘It needs help from a combination of currency devaluation and debt haircuts with the mixture varying from country to country’
    debt haircut very early and very large I agree, but currency devaluation, well let’s see other countries similar to Greece with their own currency, Romania, Hungary etc. they have issues also. Currency might be the trigger but might not be the fundamental problem.

  6. Anonymous says:

    Hi Shaun,

    Sorry it’s slightly off topic today, But I keep reading how Germany benefits from an artificially low exchange rate.  This does benefit the big businesses by boosting their exports. However the majority of the population would benefit from a stronger currency, especially when they buy imported food, motor fuel and heating gas.

    1. Anonymous says:

      Hi Expat

      It is always swings and roundabouts like that but most discussions as you point out only look at one side. In a sweeping generalisation you could say that businesses and consumers are always on opposite sides of the exchange-rate argument. Although “high” exchange-rate countries have often prospered partly through the route of low inflation…

  7. Anonymous says:

    Seems that Greeks are disgusted with the new austerity (they are Greeks after all) and Germans are disgusted that the austerity does not go deeply enough (they are Germans after all). This is what I call a ‘difference in opinion’.
    My honest opinion, too little (I honestly think this) too late (almost everybody would agree with this) and (more importantly) utterly wrong medicine when administered alone (in Shaun’s line of criticism, you start with a big haircut, you do not finish with a small haircut).
    Well, some economic textbooks of how to accomplish an internal devaluation of an (unfortunate) member of a monetary union have to be rewritten more carefully. Not big deal (unless you live in Greece).

    1. Anonymous says:

      Hi Vassilis

      Before the credit crunch period is over I do expect this to be a big deal. Unless something very fortunate happens it will not be long before Portugal joins Greece and as I have discussed today Spain is in a much weaker state than the bond markets have priced in.

      And as I have pointd out in my updates on Ireland yes she has made some progress but other areas remain weak so to declare that she is out of the woods remains premature.

  8. Drf says:

    What I feel was an excellent analysis of the idiocy now rampant in UK fiscal policy was published in “The Daily Telegraph”.  See

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