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Portuguese report
by Euro Reporter
2012-04-26 08:42:12
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We tried stimulus and it didn’t work

Defending austerity is not getting any easier for Europe’s politicians. And Vitor Gaspar, Portugal’s finance minister has it harder than others. The country’s unemployment rate is 14 percent, and its economy, which has been stagnant for years, is expected to shrink another 3.3 percent in 2012. Opponents of austerity may cite Portugal as a country that could benefit from economic stimulus and kinder budget cuts. But Mr. Gaspar, speaking to The New York Times last week, has a message for observers who say Europe needs to substantially relax its austerity approach: We tried stimulus and it backfired. Like some other European countries, Portugal tried what Mr. Gaspar called “a Keynesian style expansion” in 2008, referring to a theory by economist John Maynard Keynes. But it didn’t turn things around, and may have made things worse.

“My country definitely provides a cautionary tale that shows that, in some instances, short-run expansionary policies can be counterproductive,” Mr. Gaspar said. “There are some limitations to the intuitions from Keynes,” arguing that the economist himself saw instances when demand-stoking policies might not lead to growth. The tough line has yet to win markets over. The yield on Portuguese government bonds – more than 11 percent on longer-term bonds — is substantially higher than the yields on debt issued by Ireland, Spain or Italy. Mr. Gaspar says the yields are “not a reflection of the fundamentals.”

The main fear among investors is that Portugal is going to have to ask for a second bailout from the International Monetary Fund and the European Union, which committed $103 billion of financial aid in 2011. The package assumes Portugal will be fit enough by the middle of next year to issue new bonds to private investors without having to pay punitive interest rates. Few investors think Portugal will be ready. As a result, they expect Portugal to do just enough reforms to persuade the I.M.F. to come up with a second bailout. But Mr. Gaspar says that view misses what’s at stake for Portugal. The reforms required by “the Troika” – the I.M.F., the European Union and the European Central Bank, which effectively determine what aid-receiving countries must do — are exactly what Portugal needs, he says: “This is the right approach to eliminate the massive imbalances that have plagued the country for years.”  But deep imbalances – like a weak export sector, budget deficits and uncompetitive labour markets – can take years to remove from some economies, said Richard Batty, global investment strategist at Standard Life Investments. But, Mr. Batty said, “As things stand, we can’t see countries like Portugal and Greece making these reforms in a timely manner that satisfies the Troika or investors.”


Former soldiers shun revolution celebrations

For the first time ever, former soldiers have chosen not to attend an official ceremony marking the anniversary of Portugal’s 1974 revolution. Instead, the military association they belong to organised a gathering of its own on Tuesday night.

The former soldiers believe the values of democracy are being eroded in Portugal, where harsh austerity measures have been imposed in return for international bailouts. The 1974 revolution brought an end to Europe’s longest ever dictatorship.

“Portugal only needs to respect the system created by the revolution in 1974, no more than that,”
said Pezarat Correia, from the 25th April Military Association. In a show of support for their cause, former Portuguese president Mario Soares also stayed away from official events marking the anniversary.


Portugal may need a bailout by September, Morgan Stanley says

Portugal may need to ask for a second bailout by September as the nation is hamstrung by weak economic growth and lack of access to bond markets at affordable rates, according to Morgan Stanley. The nation agreed to a 78 billion-euro ($102 billion) aid plan from the European Union and the International Monetary Fund last year. Yields on the country’s 10-year bonds are at an unsustainable 11.85 percent and credit-default swaps signal a 61 percent probability of default.

“We expect a deeper recession than official projections and consensus estimates,’ Morgan Stanley analysts including London-based Daniele Antonucci said in a report. ‘‘Our base case is a second bailout package by September 2012; however, we see risks of possible derailment in the medium term.’’ Gross domestic product will fall 3.4 percent this year after declining 1.6 percent in 2011, the Bank of Portugal said March 29. Portuguese Prime Minister Pedro Passos Coelho, who plans to resume bond sales next year, has said a failure to regain market access would trigger additional ‘‘support’’ from EU peers.

‘‘The current determination in Europe to avoid another debt restructuring may be challenged further down the road, if the fundamentals deteriorate,’’ the Morgan Stanley analysts wrote.  Investors with exposure to Portugal should switch from short term to long terms bonds, said the analysts, recommending selling Portugal’s bonds due 2017 and buying debt maturing 2037.

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