One group of people to be congratulated about the package..

The officials at the Ministerio das Financas and at the IMF. They worked hard, made sensible proposals, did not exactly have strong political backing, and managed to avoid the kind of crazy/inapplicable grand measures that these packages often contain.

Relative to the original Greek package, there was good progress in terms of doing sound economics.

A very good thing about the package

Lowering payroll taxes and raising VAT in order to effectively do a devaluation of the currency via fiscal instruments (or, more appropriately, levy an implicit import tax).

But perhaps I am biased towards that idea...

A big unknown from the package

Privatizing EDP (electricity provider), REN (electricity grid), and TAP (airline) in the next 7 months. Where is the private money going to come for these?

The usual pattern in privatizations in Portugal has been for big economic groups to borrow heavily from banks. But then how can you square these big loan with the increases in capital ratios in the banking sector?

My guess is that the IMF/EU/ECB team, aware of this, was trying to force a sell-off of these companies to foreign owners. But the political resistance to this will be tremendous. So I fear that, in the end, pressured to sell quickly, the government will sell cheap and give *very* good deals to the big Portuguese economic groups.

It will be especially important to see the kind of financial engineering tricks that they will come up with to hide implicit loans form the government to these groups.

Another quick (political) reaction to the package

Conditionality in these circumstances is as powerful a constraint as they get. But what kind of stable political coalition in parliament in support of what kind of government will be able to pass in the next three years the kind of legislation required in the fields of justice, health, education, housing market, local government, scrutiny and elimination of public or semi-public entities, and regulated professions? And what technical capabilities,  expertise and - especially - independent agencies are there to adequately perform the kind of analysis and cost-benefit evaluations prescribed in the package? Not sure.

The bad side of the package

After the "big bad wolf" said that they could solve Portugal's problems without firing government employees or even further lowering their wages, the political ability for any party to defend these policies went to zero. One of the many reasons why signing these deals before, rather than after elections, is a bad idea

The wishful thinking part of the package

550 million in cost reductions in health care. They should let the US and other countries fighting with cost control in health care in on the magic secret to do this.

The good side of the package

The economic analysis is quite sound. It tries to fix the problems in public finances by trying to work on multiple margins rather than enforcing any revolution.

On BBC world service

If you want to hear my reaction to the rescue package, you can catch me on the BBC world service.

Quick reaction to the memorandum

Detailed...but what is the interest rate on the loan?

MoU - Portugal

PORTUGAL: MEMORANDUM OF UNDERSTANDING ON SPECIFIC ECONOMIC POLICY CONDITIONALITY - get it here

Reminder

Link.
PS: This is probably why the EU/IMF bailout will be less severe on Portugal.

Always surprising !

The Prime-Minister announced today not the measures involved in the bail-out agreement.

Instead, announced the measures that are NOT involved!!

Well, actually the ones that have been reported in the press and are not involved!

Should then we anticipate that ones that circulated, and were absent from the NOT list

will be included? Stay tuned to the next chapter.

What's in the NOT list:

- no pay general pay cuts, not even wages paid with public debt

- no change in pensions below 1500 euros

- no wage cuts to civil servants

- no reduction in minimum wage

- no constitutional revision

- no privatization of the public bank (CGD)

- no change in copayments of the National Health Service

- no change in publicly-funded schools

- no dismissals in civil service

- no dismissals without cause in companies

- no privatization of social security

- no caps in social security

- no increase in retirement age

You can read the portuguese version in the site of the Government here (I find funny the link address has "troika" in it)

Now, let's wait to see the "IN" list !

The length of unemployment benefits

What are the effects of more generous unemployment benefits? This question is addressed in a paper by Mario Centeno and Alvaro Novo delivered last week in a labour economics conference. The paper studies a 1999 reform in Portugal, when the unemployment benefit (UB) entitlement period was increased from 15 to 18 months for people aged 30-34. However, the entitlement was left unchanged at 18 months for people aged 35-39, who are used as a counterfactual.

The figure above displays job finding rates at different unemployment durations and finds very clear spikes exactly at the time when unemployment benefits run out. Consistently with previous evidence, these results indicate that unemployment duration increases very closely with the maximum UB length. Moreover, although one could expect that more generous entitlements would allow the unemployed to look for better jobs, the paper also reports that re-employment wages do not benefit, on average, from longer UB entitlement.

(On the other hand, there is evidence that those that leave unemployment at about 15 months when the maximum entitlement was 18 have higher re-employment wages than those that leave unemployment again at about 15 months but when that was also the maximum entitlement. However, it is not clear if the best comparison would be with workers that leave unemployment at say 12 months when the maximum entitlement was 15 months.)

All in all, the decision to extend unemployment benefits in 1999 (in a period of economic expansion) seems, in my opinion, to have been misguided and wasteful. Let's just hope that, now that the troika-led reforms are about to be unveiled, the findings from the paper prove symmetric in both the business cycle and the direction of change, i.e. that any cuts in UB duration (and generosity?) during a recession will also speed up job finding.

More banking numbers

Via Economico, I learn that Millenium BCP, another of the 4 large Portuguese banks, has 2.5bn of Portuguese debt, 0.7bn of Greek debt, and 0.2bn of Irish debt.

Total assets, 97bn, own funds 6bn.

Overall, in better shape than BPI to withstand a possible restructuring of sovereign debt.

Wow!

If I read these news correctly, the head of Portuguese bank BPI (one of the four largest) has admitted that his bank holds: 2.7bn of Portuguese bonds and 0.5bn of Greek bonds.

Wow!

This in total financial assets of about 10bn, and in total assets of 44bn. (According to here). And, most important of all, with shareholder equity of 1.9bn and own funds of 2.8bn.

Double wow!

Now you know why BPI's chairman, Fernando Ulrich, shows up with a new statement in the press about public finances, macropolicy, and the government almost daily for the past few months. His fate is on the line...