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The Sharks Move In On Portugal

The prospect of a financial bailout for Ireland appears to have had no sedative effective on the markets what so ever. Rather it seems to be making them increasingly agitated. The interest on Irish bonds has risen to 9% and ominously to 7% for Portuguese bonds. Both of these are record highs. The various EU and ECB spin doctors are working 24 hour shifts fervently assuring everyone that there is absolutely no reason for concern.

On Wednesday Portugal’s two largest unions led a general strike in protest over the austerity budget pending in parliament. They seem to have had little impact on parliament.

Portugal fights eurozone contagion, adopts budget

The Portuguese parliament gave final backing Friday to a hard-hitting 2011 budget as the government rushed to quash suggestions its euro partners were pushing it to seek outside financial help.

Portuguese lawmakers approved the deficit-slashing spending plan in hopes the country can regain market credibility after figures showed it had made little progress in restraining expenditures this year.

The budget seeks savings of around five billion euros (6.85 billion dollars) through a combination of spending cuts and tax hikes, including a significant reduction in public sector wages that spurred Wednesday the largest general strike in the country in two decades.

This sounds similar to the pending budget in Ireland that has not calmed the markets. Just like the Irish government last week the Portuguese government this week is fervently denying that it has any intention of asking the EU/IMF for a bailout.

So far the Portuguese government isn’t as deeply committed to keeping the banking system afloat as the Irish government, but the banks are experiencing significant liquidity problems as a result of the contracting economy and the increasing pressure from international bond markets. So once again we have the government of an EU member state willing to adopt draconian austerity measures on a more or less voluntary basis and it isn’t making the problems go away.  . . .

Banking issues seem to be inseparably linked to this ongoing financial crisis. One reason that is being cited for the heightened concern over Portugal’s banks is that Spanish banks have a high level of exposure to their problems. A bailout for Portugal would likely run about the same cost as those for Greece and Ireland. These are of a magnitude that the established rescue fund can easily absorb. However the Spanish economy is larger than Greece, Ireland and Portugal combined. A bailout there would likely begin to put some serious strain on EU resources. There seems to be a good bit of thinking along the lines that shoving one down Portugal’s throat would be a means of postponing the day of reckoning next door.

The theme that is present in all of these crisis responses to crises that officially don’t exist is an effort to kick the can down the road rather than acknowledge that the EU is going to have to make some major structural changes. One of those is going to require an extensive restructuring of debt. There is a huge amount of bad debt both governmental and private resulting from housing bubbles and other excesses. Austerity measures are having the opposite effect of enabling the economies to grow their way out of debt. There are going to be defaults by governments and banks on a significant portion of this debt. However the present attitude of the EU leadership is we’ll worry about that tomorrow.

For anybody interested I have started a Facebook discussion group on the EU Financial Crisis. It is an open group and anyone is welcome to join. The name of the group is

European Union Financial Crisis

It can be located by a Facebook search.

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Richard Lyon

Richard Lyon