The Linguiça Express

The European Union has done it again… incoming Portuguese pork sausage… the PIGS have struck another financial blow. One currency – the euro – for countries with completely divergent economies with a completely inflexible monetary and fiscal toolbox. You may have noticed that the prices in the United States are soaring – commodities are getting more expensive across the board (cotton alone has lifted 150% in the past year), and while climatic issues, political & natural disasters and increased demand from rising economies competing for a growing lifestyle explain some of the rise, the fall of the dollar completes the story. We just don’t notice the changes quite so much, because no one is telling us that we need to cut our take-home pay by 20%... it’s just the erosion of our currency that is slowly implementing the same effect with a Congressional budget battle being the only strongly visible evidence of the turmoil.

Portugal’s problems, like those of the other PIGS (Portugal, Ireland, Greece, Spain), stems from using debt, public and private, as a mechanism for “catching up” to the standard of living of the other EU nations, but not really having an underlying means of paying that debt back. The notion that underlying values would continue to grow and hence support these borrowings collapsed with the great recession/depression; those values dropped below anyone’s imagination, but the debt-load didn’t budge.

Peter Boone and Simon Johnson, writing for the April 4, 2010 Baselinescenario.com explain: “The main problem that Portugal faces, like Greece, Ireland and Spain, is that it is stuck with a highly overvalued exchange rate when it is in need of massive fiscal adjustment. Portugal spent too much over the last several years, building its debt up to 78% of GDP at end 2009 (compared to Greece’s 114% of GDP and Argentina’s 62% of GDP at default). The debt has been largely financed by foreigners, and as with Greece, the country has not paid interest outright, but instead refinances its interest payments each year by issuing new debt. By 2012 Portugal’s debt-GDP ratio should reach 108% of GDP if they meet their planned budget deficit targets. At some point financial markets will simply refuse to finance this Ponzi game.” That “point” is now.

Credit ratings agencies downgraded Portuguese debt so significantly that the country has needed a serious of rolling Central Bank bailouts, which were (and will be?) given in exchange for a series of “austerity measures” which the Portuguese government couldn’t sell to its constituency. With the EU’s Central Bank raising interest rates, the pressures on bailed-out nations has only gotten worse. The socialist government has fallen, and the election to replace the incumbents won’t take place until June 5^th. Meanwhile, the Portuguese economy is contracting 1.3% this year, and it unlikely that the European Central Bank or the International Monetary Fund will provide more financial support without even more severe austerity requirements: massive cuts in governmental staffing and social programs, reductions in pay and benefits packages and higher taxes. To make matters worse, Portugal let its economy spiral way out of control before even confronting the issue with the IMF and the European Commission.

Can the interim caretaker government even bind the country to such loans? Will the June election produce a populist government that remains defiant to the demand of the global lenders? Will strikes and riots ensue? Portugal has been here before: “Portugal is now embarking on what will be its third international bailout since returning to democracy in the 1970s, with previous interventions by the I.M.F. in 1978 and 1983. This time, however, ‘the sense of punishment will be much stronger because the expectations of citizens are much higher than three decades ago, when Portugal was not even in the E.U.,’ said António Vitorino, who was in the Portuguese government that negotiated the 1983 rescue and a former European commissioner.” New York Times, April 7^th. Meanwhile, Germany’s economy continues to lead European recovery, and Germans are wondering why that country ever allowed itself into a currency system where the German economy would be used to support the weaker European states. This turmoil is the only element that keeps the dollar from further erosion against the Euro.

I’m Peter Dekom, and we are linked to the global economy like a string of sausages.