Saturday 9 April 2011

Bailout and the 10 Capital Sins of Portuguese Public Finances

Now that Portugal will have a bailout it is important to understand, what can be labeled as the ten capital sins of Portuguese Public Finances from a politico-economic perspective. This small essay (provided here as times goes by) may be of interest to several groups of people. The technical experts of the institutions that will negotiate with Portugal the bailout (mainly from the European Commission, The European Central Bank and the International Monetary Fund); the European politicians that lead the EU, those who have worked out the revisions to the Stability and Growth Pact (SGP) and those who are now redesigning the European Stabilization Fund ; the Portuguese citizens who will mostly suffer from the mismanagement of public finances, in particular the young generations who will pay the major part of the bill; economic journalists; and last but not least the Portuguese politicians who will run Portugal (and those who will stay in opposition) after the 5th of June general election .
As will become apparent some of the "sins" have developed in close connection with the structure of incentives embodied in European rules. Others are more idiosyncratic. The interest in presenting them is that although they are specifically Portuguese, and should be taken into account by different “stakeholders”, they exist in slightly different forms in several Europeans countries. So what some of them reveal is the urgent need for reforms at an European level.

The order of presentation will not be the sequence of relevance and all comments will be welcome. The timing of writing is uncertain, but I will try (not promise!) one or two contributions per week.

PS Some economists disregard the problem of public finances saying that the problem of Portugal is lack of economic growth and that having the latter the former will be solved. We all know that there is a relationship between the nominal growth rate, and the deficit-to GDP ratio that sustains a constant debt-to-GDP ratio. When the Stability and Growth Pact was designed, politicians assumed European economies will grow nominally on average at 5% so that a deficit ratio of 3% will keep the debt ratio at 60%. Although it is obviously truth that growth really matters, the argument that deficit and debt are just a byproduct of other issues is not only fallacious but also dangerous. As we will show the mismanagement of Public Finances in Portugal is a consequence of several structural problems, the sources of which are independent from economic growth. If these problems are not solved, they will impair economic growth, ie they will have a counter-effect on any measures taken to improve growth. That is why it is dangerous to disregard them.


  1. Yet this only happened due to the speculative attacks to our sovereign debt... Though this is not a valid argument, there are several Eurozone countries that would had exactly the same problems if they had been under the same kind of pressure.
    Of course we have lots of reasons to complain and became very vulnerable due to a range of acumulated economic policy mistakes through the years. Our governments have been unwise and increased public debt to the verges of obscenity - therefore, we have to acknowledge that we had it coming. However, the real issue here is this: not only we've lost the ability to have a monetary policy (actually it's even worst: we have to live with the German monetary policy!), but it seems that we've also lost the right to a budgetary policy. So, it is absolutely impossible to resist to these kind of speculative attacks while keeping any possibility of economic growth.
    Also, the same countries that will force us into a series of economic constraints will be the ones growing ahead of us during those years. And the interest rates payed by Portugal will be higher than those that most countries can find in the market - which means that for them this bailout is a low risk, highly profitable financial operation.
    Last but not the least, in the very next day after Portugal bailout has been announced, the ECB increased the interest rates - which is pretty self-explanatory about how concerned they are with our economy.
    But never mind... that's just European solidarity at its best!

  2. And the Bn of Euros of Portuguese Public Debt in the books of ECB don't count? That's not solidarity?
    And the Bn of Euros of financing from EIB don't count? That's not solidarity?
    And now, the Bn of Euros from the rescue package also dont' count?
    Let's keep a bit of good common sense.

  3. Actually, the ECB should and could have bought more Portuguese debt, keeping the interest rates at a much lower level, which after a few months would demobilize the speculators - and that would have been real solidarity.
    The raising voices against the Portuguese bailout in many European countries have just one purpose: increase the rescue package interest rates - and that also shows how this "solidarity" works at the EU level.
    If I loan you money at high interest rate and control your country's finances in order to make sure that you pay me, that shows 2 different things:
    - How much I trust you and how friends we are;
    - I will get very well paid for my loan - and don't want to take any risk with it.
    Let's face it: the Euro is an awful, badly planned idea... though there are several structural problems in our economy, we don't have the same problems as Greece and Ireland - and we were led into this bailout for the very same people that will "rescue" us from it.

  4. We were led into this bailout because we, JUST WE (read our politicians), have been unable to manage our public finances properly, and we have structural public finance problems, as I will intend to show in the next 10 posts. See also my article this Sunday 17th on Publico newspaper.

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