Elections and revision of the public deficit

Today, two pieces of news: elections set for June 5 and revision of the public deficit.

At the same time, interest rates on public debt are still rising. The question is why. It is tempting to link it to one or both pieces of news. Somehow, this is sounds unconvincing.

That elections would have to take place has been relatively obvious since past week, so no surprise there.

On the revision of the public deficit, if it was the case that new information on previously unknown spending was surfacing, I would understand it. But the revision does not bring new facts, just rearranges expenditure. It is counting as part of public deficit the debts from public transport companies (railways, subway) and the rescue of two private banks (BPN and BPP). (you can read the press release with the explanation here: Press release by INE)

None of it is new.

The deficits in transport companies are usual, and sooner or later will have to be covered by the Government.

And none of the rearrangement of how public accounts are reported brought new expenditure to the open. So, it is hard to understand any "financial market" reactions, unless we want to consider that operators in international financial markets still have shallow knowledge of the Portuguese economy.

An alternative explanation, is that I am neglecting something, of course...

Still on privatizing Caixa

The comments box on my previous post, together with the two cited articles, have several good arguments for why, or why not, Caixa should be privatized in the long run. However, my concern in the last post was with the next 6-12 months. And, frankly, I don't see how that is possible. My concerns are:

1. In the next 6-12 months, Portuguese private banks are going to have to recapitalize. Judging from the noise they have made about this, they are very worried that they will not find the needed capital in Portugal. So, if there isn't private money out there to raise capital ratios in private banks by a few percentage points, how can there be enough money to buy 100% of the capital in one of the largest banks?

2. An answer is foreign capital. But then, let's be clear. Privatizing Caixa right now is not just putting it in private hands; it is putting it in private foreign hands. Is that what the people proposing it really want?

3. But even if that is so, I am skeptical that you could find a foreign group that would want to buy Caixa right now, and pay a decent price for it. The natural candidate, Spanish banks, have their hands full with their own problems. And with the amount of uncertainty about Portugal's economic prospects over the next two years, would anyone really be willing to invest this much money in the country?

So, I just don't see it.

I do see the opposite direction, where the government has to inject public capital into the private banks. And I don't have to think too hard to come up with several scenarios where this happens, some desirable, many not so.

Public Debt 1850-2011

It's now official. We have the largest public debt as a percentage of GDP since, at least, 1850. A sad, sad legacy.

Public Debt as % of GDP, 1850-2011

 Source: Mata and Valerio (1992), Neves (1994), INE, Santos Pereira (2011)

Privatizing Caixa

Caixa Geral de Depositos is one of the largest Portuguese banks, and it is owned by the State. It is a profitable bank with significant market value, and the Social-Democratic Party suggested privatizing it a few days ago. The immediate goal is to raise revenue to reduce the public debt. Pedro Lains and Alvaro Santos Pereira, contributors to this blog, have written about it elsewhere, against and in favor of privatization, respectively.

This debate puzzles me. When I think of the big policy challenges in the Portuguese financial markets in the next 6-12 months, it is not privatizing the State bank that comes to my mind. Rather, it is whether or not to (partially) nationalize the private banks.

Same topic, opposite sign.

Income Account vs Trade Account: a dramatic milestone for Portugal

This is a figure from the latest Banco de Portugal's Economic Bulletin - Spring 2011: Projections for the Portuguese economy: 2011-2012, published yesterday.

A dramatic consequence of the increasingly negative Portuguese net international investment position as well as of the rise of our external credit interest rates: Banco de Portugal predicts that in 2011 the income account deficit will surpass the trade deficit (which never happened in the past, to the best of my recollections); and that in 2012 the income account deficit will amount to 7 percent of GDP.

In other words, a substancial part of our domestic income will be subtracted from national income, and therefore the nation's disposable income, in the foreseable future.
Even though we may get the (irrealistic, from my point of view) forecasted growth in net external demand that would avoid an even higher drop in GDP, a lot of that GDP will not be ours to consume or save.

A dramatic milestone for this country.

Minimising future problems

Some evidence that I obtained earlier indicates that state-owned firms in Portugal tend to increase their hirings considerably (by as much as 50%) in the months just before general elections. Now that an election will probably take place very soon - and when some of those firms have so many financial problems -, it would be really important to try to minimise that very peculiar pattern of hirings this time.

I wonder if the government and/or the parliament could impose a ban on hirings during the next few months (including the months just after the general election too)? Or at least demand greater transparency on those appointments? One idea could be to require state-owned firms to disclose on the web the names and CVs of the new appointees and their job and pay levels.

"A Nation of Dropouts Shakes Europe"

The Wall Street Journal writes about the Portuguese education system - in a not very flattering light.

Prime-minister resigns, next steps?

And the announced path has been walked down half-way - the portuguese prime-minister resigned today, after the new austerity measures have been rejected in Parliament.

Does it mean they will not be applied? hardly the case, most likely the measures

will adopted, and since several, if not most, would take effect only next year, there is still time for this or another government to apply them.

Does the political crisis bring a bailout closer? it is difficult to say, but again it is hard to believe it should, as there are not many policy options; in particular, it is not predictable the government entering a spending frenzy to gain elections - people are aware and concerned about the budget prospects and the costs it will entail.

Solution to the political crisis? several options are available, including finding another government solution within the current parliament, with some sort of majority in parliament. We have to wait for the meetings the President will hold with the main political parties, though the first reactions of parties point to elections. If another solution is attempted, then it means a very active role of the President backstage.

Will elections solve political instability? I give a 50% chance it may keep everything the same.

Are elections needed? probably yes, people in the street feel the need to express their views, and probably want some hope and common purpose, let's see how much of it politicians are able to deliver if elections becomes the way forward

Healthy crisis

In a smart move, the main opposition party released a statement in English yesterday, hinting that a political crisis now may very well be a good thing in terms of the sustainability of the Portuguese economy. In any case, a general election is surely the only way to restore trust in the government, given yesterday's clarification on PEC 4b by the Eurogroup president.

Δεν είστε μόνοι

Interesting post (Can Greece pull it off?) in VOX by the European Economic Advisory Group.

Here is the abstract:

Will the Greek rescue package be enough or is restructuring inevitable? In this column, members of the European Economic Advisory Group argue that even if the sovereign debt crisis is resolved, Greece must deal with its unsustainable current-account deficit. This requires an unenviable choice between internal and external depreciation and a government strong enough to take on the country’s rife tax evasion.

Does this remind you (hint:current account) of anything?

The horror scenario

Portugal: finally about the banks

Credibility deficit

Everybody knows that politicians will have, almost inevitably, a difficult relationship with the truth. But the latest developments in Portugal's political life increasingly remind me of Orwell's "1984" and the sudden shift in alliances there between Oceania, Eurasia and Eastasia - while, at the same time, the ruling class got to persuade the people that the ally had always been the same.

The "problem", of course, is that we aren't in the totalitarian world of "1984". Whoever is willing to spend a few minutes on the internet can easily expose many recent, glaring reversals in policy goals over a period of only a few months (for instance, here, here and here).

Even if one can leave aside issues about the strength of political convictions (which are irrelevant from the point of view of the hard-nosed international markets), questions about credibility become increasingly more pertinent: Can the European Commission (and/or Germany) really pretend to believe a program of reforms such as a 17-slide PEC IV which, at least in some areas, is in complete contradiction with what were regarded as fundamental principles for many years up to just a few months ago?

Policy options...

... to deal with “precarious” jobs and segmentation:

1. Increase public sector employment
2. Rule out temporary jobs, “recibos verdes” and traineeships
3. Cut dismissal costs for all permanent jobs
4. Cut dismissal costs for new permanent jobs
5. Merge temporary and permanent jobs into a new, single contract type

Some evidence on the segmentation of the labour market

The table below presents mean characteristics of workers under permanent and temporary contracts, according to the 2009 personnel records ("Quadros de pessoal"). "Recibos verdes" are excluded, as well as those working for temporary agencies, on traineeships (and the unemployed).

Only workers aged 25 to 35 and with a university degree are considered, a total of about 220,000 people. 35% of these workers are found to be on temporary contracts.

Gender, age and schooling means appear to be similar across the two contract types. The big differences emerge in terms of tenure (years with the same employer): 4.5 in the case of permanent workers and only 1.6 in the case of temporary workers; and monthly gross salaries, 1,600 euros in the case of permanent workers and less than 1,200 in the case of temporary workers.

Peaceful demonstration

We have seen in the news a crescendo of interest on today's demonstration,

and how it could go.

In the end, despite the announcement of more hard and harsh measures to

bring the budget deficit under control, despite interest rates in Government debt reaching

historical maximum in financial markets, all of it went peacefully in Lisbon, Oporto

and the other cities.

If the international press (and perhaps some national press as well) was hoping

for tears, blood and smashed windows of stores, nothing of that sort resulted.

Not sure what it means... but much better than having violence around, for sure.