Friday, 26 February 2010

Beware of Argentineans bearing gifts

“At the present moment we are going through an economical and monetary crisis which is of a certain gravity, but is not irremediable, inasmuch as the principal causes of the crisis are fleeting and purely temporary. This crisis is in a great measure the counter-result of the general crisis which all the European nations in general, and England in particular, have passed through since the breakdown of Argentine securities. The political question is not nearly as serious as is generally believed... The freedom of the Press exists to a much greater extent in Portugal than in France.”
Selectively quoting from past sources can always give the impression that history just repeats itself. I did my share of that by extracting the above sentences from an interview given by Emídio Navarro, a representative of the Portuguese government, to The Times, in August 1891. By then the country had gone through a serious of bank failures and bailouts, was three months into a monetary crisis and four months before defaulting on its external debt. Emídio Navarro duly tried to reassure the markets by claiming that the crisis was less due to Portuguese causes than to the contagion from the default of another country (Argentina) and the general financial crisis that ensued, namely in Britain. Nevertheless, political instability (an abortive Republican revolution) further raised the anxiety about the country’s finances. The placement of a large external loan had almost failed five months before, despite only providing for a brief respite to the government’s difficulties.

Closer to our times, the Portuguese finance minister, Fernando Teixeira dos Santos was quoted on February 5th by CNN as thinking that “the markets are overreacting because the Portuguese situation is quite different from the other countries. In Portugal, of course, we have a high deficit as many other countries in Europe and all over the world due to the international crisis.” On the 9th, in an interview to Reuters Teixeira dos Santos showed confidence on the success of a new 10-year 16.5 billion euro loan: "This is something that we have to do and we can't be scared of going to the market."

It is tempting to continue with this exercise and speculate about worst-case scenarios in the event of a further deterioration of market sentiment. Álvaro’s post gives a long-sweeping perspective on the weakening of the Portuguese external position, but in finance timing is almost everything, and trends are not always conclusive. The possibility of a current account crisis in Portugal has been mulled by economists long before the World credit crunch, but Greece ended up being the weakest link within the Eurozone. A contagion scenario from a Greek default has, of course, been abundantly commented and we should be wary of another Greek gift.

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