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Ways of Treading Water I: Eupdate Portugal

posted by Anna Gelpern

Every so often, I want to blog about something other than the EU debt/banking/ fiscal/political crisis, but the continuing loopiness leaves me little choice but to launch a series:  Welcome to Eupdate.

Two things have happened in the Eurozone since my last pre-Eupdate update:  Portugal has asked for and negotiated a rescue package, and Greek restructuring rumors have gotten out of control.  Both nicely fit into the dominant theme of treading water, but present interesting variations on the theme.  I elaborate on Portugal below; I address Greece in a separate post.

Portugal asked for help when its banks staged a buyer's strike at a government debt auction on April 6.  The timing was awkward, since the government in power has no capacity to make policy commitments pending an election it is likely to lose on June 5.  The day the news broke, headlines blamed greedy banks.  I poked around to see what they had been doing for the past year or so--turns out they were busy loading up on government debt, so much so that the banking system's holdings of said debt doubled since the start of the crisis.  Treading Water 1.


But wait--why the leveling-off in 2010?  A little amateur trawling of the Portuguese central bank website reveals that the leveling-off coincides roughly with the European Central Bank's securities market program.  Treading Water 2.  Sure enough, the day after-the day after, the banks blamed the ECB for refusing to take Portuguese government debt off their hands.

Now that Portugal has been pushed into the loving arms of the EU and the IMF, what next?  According to the government's statement Tuesday night, it has negotiated a program that requires it to do nothing much for EU78 billion (USD 116 billion), split 2-1 between the EU and the IMF.  In a brilliant diplomatic move, Portugal also said it got better terms than Greece and Ireland.  Treading Water 3?  Today's reports say the program is quite a bit leaner and meaner than the Portuguese authorities first said.  It will buy "breathing space" for Portugal to regain market confidence, among other things, by having the government recapitalize and guarantee the banks.  All good ideas.  And round and round we go.


I followed the link from naked capitalism. My suggestion ( http://reservedplace.blogspot.com/2011/04/principals-of-subsidisation.html ) is that, instead of lending to troubled countries like Portugal or buying their bonds in the market, the eurozone/EU countries just subsidise the troubled countries' interest expenditure. That would isolate the troubled countries from increased market interest rates without letting private sector lenders off the hook, until the troubled countries either solve their problems as they claim to be able to do, or give up and default/restructure. As it is, any default increases the burden on the most marginal country to have contributed to previous bailouts, putting them at risk of needing a bailout themselves, and so on.

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