Friday 14 January 2011

Is the Forest Black?

The average interest Portugal is paying for [the stock of its] 10-year bonds is about 3%. Right? As the new issues cost 7%, the average rate is increasing (La Palisse). I wonder whether someone has already estimated the pace of growth of the interest rate. But the feeling is that this cannot last for much longer.
Now that Passos Coelho, the leader of the main opposition party, the Social Democratic Party, is seeing his chances of becoming prime minister increasing, many people are finally joining the old conclusion that our mess cannot be solved by the national government alone, whichever party is in power. Even less so by the President whose powers are quite limited. It seems that everyone here is now finally seeing the forest.
Portugal’s problem is a European problem, fortunately, and thus it needs a European solution, fortunately or not.
And Portugal's problem is different, considerably different, from those of Ireland, Spain or Italy (let's not speak about Greece here because Greece is where Greece is). Portugal still didn't have the time to find its proper position within an open European economy. Its economy was weaker and poorer when it joined the Communities, the Single Market and the euro (yes, we can learn a few lessons from Economic History), and still hasn’t adapted. It has an economic problem, with financial overtones, not a political problem.
The bottom line is that we need an answer quickly about how the mess is going to be solved, within the European Union. If the answer takes too long, we can always go back to the protectionist mode (which wont’ happen…).


  1. Sorry, but I cannot agree. Portugal has a political problem which then, in turn, causes an economic problem. The state is all powerful and interventionist. Instead of the free market economy choosing the winners and losers more and more in Portugal it is the state that chooses. This, in turn, creates a subsidio dependente society.

  2. Well... I have to agree with Plain Speaking... we only have an economical problem because of the political problems... I would go further and would call it more lack of qualified political people.

    By the way, the "cheapest" bond available is a 3.35% coupon with a maturity to 15/Oct/2015 (9.649 Mio). The most expensive is a 5.45% coupont maturing in 23/Sep/2013... In the middle we have some floaters, but they are so small that they don't count... so I find it difficult that our 10yr debt is averaging @ 3%.

  3. I totally agree that selling Portuguese Bonds for 7% of return of interests is totally unsustainable and I do would like to keep track of the average annual interests Portugal must pay to honour his debt.

    Right now, I figure that politicians are hoping that markets will ease down and that the days of 1% to 2% interest rates in bond selling will come back.

    Quite frankly, I believe that we must tough it out tougher. Tougher than the actual austerity measures, so that we can quickly get rid of the darn debt.

    The only future debt I can allow, as a voting-informed-educated-citizen, is to develop new infrastructures that would effectively speed up commerce, such as a new airport, or a new high-speed train axis Lisbon-Madrid.

    The demographics are here, the ratio between working-age people and retired ones is only goind down: people will need to discount more in order to sustain a social state. And a social state is what I want. I want Sweden! Not the US!

  4. I agree with guillaume riflet.

  5. To keep track on the interest rates that the government is paying you just need to check the budget and it's execution. If you're a really informed person, you should know this... It's all there.

    The real problem comes with the "debt" that is not registered as debt. One example is the PPPs... nobody know how much we will pay for them in the future as the calculations are based on unreal variable assumptions.

    I am completely against the copy of other country's models, specially countries that have nothing to do with us. We should have our own model, based on our own capabilities and cultural background.

  6. my 2 cents...

    About the political problem, you can also argue that the systemic problem of the portuguese economy has allways been the anemic private demand, which forces public spending and leads to a strong government. The old chicken and egg dilema...

    Second 7% interest isn't unsustainable, more if already reflects the euro devaluation expectation. Our debt is expressed in euros, and the way the PIGGS economy is going the EURO has to depreciate, hence the interest rates for bonds are going to be higher.

    Also adds that 7% is the price on the new issue, not the average price of our debt, and that the major liquidity supplier the ECB isn't charging the same rate to portuguese banks.

    Main problem is that no bank is going to lend money to private companies if they can lend at 7% with no risk, so thats a major distortion of the economy.

    It would be better if the ECB lended money to Portugal at the same rate they are lending to the Portuguese Banks..

    All in all, I think that the deeper we dig into EU political economy, the more it stops to make sense...