Le dernier ressort

"...The historical record shows abundantly, in contradiction of such theories, that financial crises are a persistent phenomenon and that they are generally, but not always, alleviated by a lender of last resort, often one that insisted in advance that it would not come to the rescue."


In his fascinating Financial History of Western Europe, Kindleberger describes the genesis of the lender of last resort and the gradual assumption of this role by central banks. But why should we care about our own financial history? Obviously This time is different...

here Paul de Grauwe on the ECB and the LLR.

Were the last 10 years different?

Via facebook, I got to this post by the founder of The Portuguese Economy blog, Pedro Lains. I am not sure I understood everything Pedro wrote. But I think that Pedro is arguing that Portugal has always been dependent on foreign financing, so there is nothing new with the current crisis.

I agree with the first part of this sentence, and the mechanics of how a country can run a current account deficit for centuries is part of my lecture notes, where Portugal and Canada are the two examples that I use. But I don't understand the second one.

Below is a figure of the current account divided by GDP since 1953, split in 1995, when there was a change in the source of the data (before 1995, series longas para a economia portuguesa, afterwards Pordata). Also plotted is a horizontal line with the average current account deficit of the last 10 years (-9.8%).

The pattern of deficits may not be new, but the size and duration seem quite unusual to me.

Update: Here is the picture, subtracting transfers from the current account.

New Fiscal Data released by DGO (end-of-September 2011 cash data)

For the interested reader, the cash data for the January-September 2011 budgetary execution (released yesterday by DGO – publicly available here) points to a State budget deficit of 3.8% of GDP which compares to a deficit of 5.4% of GDP over the same period back in 2010. The year-on-year growth rates of revenues and expenditures of the State were 5.2% (1.9% in 2010) and -3.8% (2.0% in 2010), respectively.

Jornal de Negocios’ news elaborate on this by reporting that expenditure with public employees is falling more than 6%, reflecting the 5% average wage cut that took place earlier this year (see here). Simultaneously, the revenues’ side is over performing, mostly driven by direct taxes paid by enterprises and VAT (see here).
All in all, the State budget deficit is falling more than 30% since January (more here).

Portugal remains one of the OECD countries with the highest unemployment rate

According to the latest OECD figures, updated until August 2011, the 12,3% unemployment rate in Portugal is only overcome by 5 countries. In particular, by Estonia (12,8% in June), Slovakia (13,4%), Ireland (14,6%), Greece (16,7%, in June) and Spain (where, contrarily to the trend, unemployed people keep on growing and they currently amount to 21,2% of the labour force).

The average unemployment rate for the aggregate OECD group was kept unchanged in August, at 8,2%, sligthly smaller than the Euro-area and US' numbers, 10% and 9,1% respectively.

More information here.

Source: Labour Force Statistics

New conditions in terms of financial assistance to Portugal

Copied from the COUNCIL OF THE EUROPEAN UNION, provisional version, press release, 3119th Council meeting, Luxembourg, 11 October 2011:

"PROVISIONAL VERSION 11.X.2011 ECONOMIC AND FINANCIAL AFFAIRS

Financial assistance to Ireland and Portugal

The Council adopted two decisions amending the terms of financial assistance granted to Ireland and Portugal under the European Financial Stabilisation Mechanism

The decisions extend the maximum average maturity of the loans to Ireland and Portugal to
12,5 years, while the maturity of individual tranches of the loan facilities may be of up to 30 years. The interest rate margins will be reduced to the EU's cost of funding. The extension of maturities and the reduction in the interest rate margin will also apply to the tranches that have already
been disbursed.

The decisions amend implementing decisions 2011/77/EU and 2011/344/EU on granting EU financial assistance to Ireland and Portugal. They implement conclusions reached by the euro area heads of state or government on 21 July 2011."

Updated information and data on Portuguese's Quarterly National Accounts Q2-2011

On 30th of September INE published data on the national accounts for the institutional sectors for the 2nd quarter of 2011.

In summary, the General Government deficit (national accounts) was 8.8% of GDP in the 12 months ending in Q2 (decreasing from 9.3% in the previous quarter), mainly due to reductions in wages and social transfers in kind.

Indebted Madeira votes long-time leader back

Alberto Joao Jardim, president of Portugal's autonomous Madeira archipelago, won regional elections Sunday, even though he has been blamed for (unreported) debts that boosted the country's overall deficit. This relates to Fitch's statement last Friday that Portugal's outlook was negative, meaning that its BBB- rating could be further downgraded in the near future. Recall that the Madeira bill further burdened Portugal's deficit (it amounted to 8.3% of GDP in June, far from the 5.9% end-of-year target). In fact the Finance Minister Vitor Gaspar said recently "These irregularities... impact negatively on the country's credibility".

Official results showed that the Social Democrat Party (PSD) obtained 48.56% of the vote, its worst result under Jardim's 33-year leadership.
CDS-PP, which forms the national ruling coalition along with the PSD, came second with 17.63%, well up on the 5.34% it got in the last elections in 2007.
Portugal's main opposition party, the Socialist Party (PS), had to content itself with third place taking just 11.5% of the vote, down from second place and 15% in 2007.

Americans Sargent and Sims Win Nobel Economics Prize

Today the Royal Swedish Academy of Sciences awarded two Americans, Thomas Sargent and Christopher Sims, the Nobel in economics. The prize's justification is as follows: "for their empirical research on cause and effect in the macroeconomy".

According to the prize committee the winners developed methods for answering questions such as how economic growth and inflation are affected by a temporary increase in the interest rate or a tax cut. Sargent and Sims, both 68 years old, carried out their research independently in the 1970s and 1980s.

More details on the prize can be found here.
For the winners' personal webpages: Thomas Sargent and Chris Sims.

updated information on the Portuguese economy

The Bank of Portugal released today forecasts for the Portuguese economy. The recession is predicted to be worst than in previous assessments. This of course will create more problems in meeting the targets for the public deficit.