Yesterday evening the Portuguese Prime Minister Jose Socrates gave a speech on Portuguese television to announce that he had achieved a bail out deal with the European Union/European Central Bank/International Monetary Fund troika. Mr. Socrates further said that this was a “good” but “demanding” deal for Portugal. How he could say this when he was unable to declare the interest-rate that will have to be paid on the money merely illustrates his usual combination of hyperbole and disregard for reality.
The interest-rate is important on two counts. Firstly one would regard any individual who takes a loan without asking what the terms will be as somewhat financially illiterate.To do so on a national scale is breathtaking. Secondly if we look at the bailouts that have taken place so far in the Euro zone the interest-rate that is supposed to be paid has changed fairly regularly! If we take the case of Greece it was originally estimated at 5.23% was then expected to maybe rise to 5.8% to match the proposed rate for Ireland and was recently plans were introduced to reduce it to more like 4.25%. The interest-rate for Ireland was supposed to be 5.8% but the Irish government is trying to renegotiate this as frankly under such a rate she still looks insolvent. Indeed under the interest-rates charged so far every country has looked insolvent! So as the character Turkish points out in the film Snatch ” I fail to see the link between this and a good deal”.
What are the terms that we do know?
Portugal will borrow some 78 billion Euros for a three-year term from the EU/ECB/IMF troika. In return for this Portugal has agreed to an austerity programme which will have as targets a fiscal deficit of 5.9% of its economic output for this year and 4.5% next year and 3% the year after.
How does this compare with previous plans?
Back on the 5th of April this was the plan for Mr. Socrates’s government.
Moreover, both the government and the main opposition party have already reaffirmed their commitment to the budgetary targets 2011-2013, namely 4.6%, 3% and 2% of GDP. Therefore, those targets will be maintained.
If you compare these numbers to the new targets we can see what is being referred too by Mr.Socrates as a “good” deal. The new targets are 1.3%,1.5% and 1% of GDP lower than before. However let us grab Mr.Socrates hand before he slaps himself on the back as there are sevral problems with calling this a good deal.
1. If the original targets were required for Portugal’s future why are they now being abandoned.
2. We now see that maintaining something can mean less than a month! This is hardly going to leave potential investors with the idea that Portugal is secure in the longer-term.
3. If we recall that Eurostat had looked at Portugal’s fiscal defict figures and re-written them the fact is that the original plan was now unviable. So yes Mr.Socrates is trying to misleadingly take the credit for a sequence of numbers which may look better to the uninitiated but in fact show that Portugal’s position has deteriorated yet again.
For the year just ended Mr. Socrates’s government had originally declared a fiscal deficit of 6.8% of GDP and declared it a great success as this number beat its target of 7.3% of GDP. Unfortunately for his numerical fantasies Eurostat then looked at the numbers and decided that the true number was 8.6% and then upon a closer examination decided it was 9.1%. Some might call this an attempt at misrepresentation whereas Mr.Socrates’s government calls it a “methodological dialogue.
The fiscal deficit figures for the previous three years were also revised upwards which working backwards from 2009 were raised by 0.5% of GDP and 0.5% and 0.4% respectively. Where the full impact of such revisions was felt was in the ratio of Portugal’s national debt to its GDP. Previously this was estimated at 83.1% of GDP whereas Eurostat’s revisions raised it to 92.4%. This is quite a material amount particularly when we consider all the boasting that had gone on from Portugal’s government about the previous figure.
In other walks of life people would be put in jail for this sort of misrepresentation.
What Mr.Socrates will not do
You might think that Mr.Socrates would be primarily discussing what is required but I am grateful to the Portuguese economist Pedro Barros for pointing out that he has in fact given us a list of what he will not do. You might think that such political posturing is somewhat bizarre but here it is.
- no pay general pay cuts, not even wages paid with public debt
- no change in pensions below 1500 euros
- no wage cuts to civil servants
- no reduction in minimum wage
- no constitutional revision
- no privatization of the public bank (CGD)
- no change in copayments of the National Health Service
- no change in publicly-funded schools
- no dismissals in civil service
- no dismissals without cause in companies
- no privatization of social security
- no caps in social security
- no increase in retirement age
To my mind if someone is that comprehensive they are trying to hide what is in the list of what they have to do! As ever this will no doubt be leaked in time. Furthermore according to Google translate Mr.Socrates also said this.
The international institutions recognize, therefore, that the Portuguese situation is far from being like that of other countries and far from the house as some wished to describe.
A rather odd thing to say as your hand is stretched out for a bailout is it not? Or you could read the bit that the Portuguese situation being different from other countries as in fact being rather accurate!
It would appear that the Euro zone is determined to repeat its previous mistakes and is not an organisation which seems to learn from them. There are three glaring errors with this rescue plan as it stands.
1. An interest-rate which makes Portugal look solvent in the long-term should have been applied to these loans and announced at the beginning. Say 4% for example. Instead we have no announced interest-rate ( If a year into these bailouts the Euro ozne does not know what it should charge….)
2. After having to extend the three-year term for loans to Greece and talk about this for Ireland the Euro zone has yet again offered a three-year term for a programme. Yes the same three-year term that has not and will not work the two times it has been tried. Rather ironically at a similar time to Jose Socrates public address and adviser to the Greek Prime Minister was giving a talk at the london School of Economics suggesting that Greece needs “rescheduling — or re-profiling as it is called sometimes”.
3. The programme does not directly address the fundamental problem which Portugal faces which is a lack of economic competitiveness. This has dogged her for the past twenty years and accordingly was a feature of her economy way before the credit crunch hit. Looked at like this where it is plain that a long-term solution needs to be applied it is even plainer that the three-year term of the package is a combination of a mistake and a fantasy.
What is the true Portuguese situation and what can be done?
One of the features of this crisis is the way that political leaders have ignored reality. Back on the 27th of April 2010 I pointed out four main problems for Portugal on my “old” Notayesmanseconomics blog.
Since joining the Euro Portugal has had the slowest growth rate of the euro zone nations which contrasts her strongly with Greece who was growing (assuming you believe the numbers) at around 3/4% per annum over this period. Portugal has had an average rate of less than 1% over this period. This has been caused by several factors.
1. There has been a “brain drain” where many educated Portuguese emigrate although because of EU rules it is hard to get exact numbers.
2. Portugal had and has quite a few industries which are price competitive and these have been affected by the growth of price competitive manufacturing in China and the Far East as well as in Eastern Europe.
3. Portugal had a privatisation programme for many utilities but it would appear that there has been a form of “soft corruption” where ex-politicians rather than businessman have been appointed to the boards of such firms making them inflexible and the reverse of dynamic.
4.Portugal has rigid labour laws, which there is little political will to reform and she has one of Europe’s toughest employee-protection regimes.
These need to change and you may notice that the implication of Mr.Socrates list of what he will not do was exactly the reverse of this. the bailout as announced does not address any of these. Indeed looking back to the 5th of May 2010 I see a point I made then which now looks rather prescient about Greece and now applies to Portugal going forwards.
Another issue is how exactly will Greece put herself in a position to repay these loans? There is no real answer to this so the begged question that is forming in people’s minds is what will the replacement aid package look like?
I like Portugal so I say this next bit sadly, this package will fail as it does not address Portugal’s true problems. Also I am concerned about the democratic legitimacy of a caretaker government which had its policies rejected in Parliament in effect setting bailout terms for Portugal. This is the job of a new elected government not the job of one which has lost most of its legitimacy.
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