Thursday, 24 March 2011


On 23 March 2011, all of Portugal's political opposition parties voted against Prime Minister Jose Socrates' proposed austerity measures - the fourth in less than a year - that would have paved the way for a bailout. Like Ireland and Greece, Portugal has gone after the middle class and workers with higher taxes, cuts in wages and jobs, and reductions in social benefits and programs. Never did it occur to the government in Lisbon, any more than those of Athens and Dublin, to at least threaten default as negotiating leverage that would have the creditors offer better terms or lose billions in payments. Admittedly, default would have very serious economic consequences for the short term as it did in Argentina ten years ago. But is Chinese water torture any better for millions of middle class and working people in debtor nations like Portugal?

The news of Socrates' abrupt resignation overshadowed the EU summit meeting (24 March 2011) in Brussels scheduled to discuss the sovereign debt crisis in Portugal, Ireland, Greece, and potentially Spain. Portugal's political crisis over fiscal and economic issues coincided with the US-UK-French-led air war against Libya that has NATO divided and the principals arguing about the millions of dollars/euros spent every day to topple Muammar Gaddafi.

Mass protests against EU leaders in Brussels about austerity measures imposed in varying degrees across Europe - much worse for Greece than for the rest - has not bothered heads of state who are preparing to place Portugal under rigid austerity as they have Ireland and Greece - essentially reducing them to financial dependencies of Germany and France. Government ministers and opposition adamantly deny that Portugal will resort to a bailout like Greece and Ireland, but Holland's prime minister Mark Rutte and German Chancellor Angela Merkel were categorical that the government after Socrates needs to put its public finances in order through a series of austerity measures as precondition to receiving loans.

The bailout may cost at least 80 billion euros, but it could as high as 110, while the price Portugal must pay is to surrender its financial and economic sovereignty along with trade, investment, labor and social policy to the creditors that demand fiscal austerity and neo-liberal policies. Unemployment is currently at 11.5% lower than Spain's 20% and lower than Greece's 14.5%. However, unemployment for all three southern European nations will be rising in 2011, with all the sociopolitical consequences of such a trend.

Having established the European Financial Stability Facility as a 'bailout' program, the question is whether that is sufficient to cover Spain if it follows Portugal, Ireland and Greece, the last two having borrowed a total of just under 200 billion. And what if Belgium and Italy need assistance, as many investment firms are speculating? Unlike Greece whose public debt to GDP ratio stands at 144%, Italy's at 118%, Belgium's 99%, and Ireland's at 94.5%, Portugal's is at 83%, or fifteen in the world - world average is 59%.

Part of the problem with Portugal was that it borrowed heavily under the encouragement of private banks and the EU in the last thirty years; a path that Greece and Spain followed as well. But this is exactly what most of the world was doing with the encourage of governments and banks that rewarded debt policies. Throughout the 1990s while pursuing monetary convergence under Maastricht treaty provisions, Portugal, like Spain and Greece sustained large budgetary deficits, although the productivity and investment increased and labor's share of GDP declined especially in the first half of the 1990s. The Bank of Portugal followed the policies of the Bank of Spain that provided low interest rates to stimulate growth and demand, in the absence of a sustainable development program that would generate growth. 

In the first decade of the 21st century, Portugal continued to borrow heavily as did all of southern Europe, but invested in questionable ventures, wasting a great deal of the borrowed money in public projects that had little value, using the public sector to reduce unemployment by creating redundancies, and raising salaries as a means of stimulating demand. All of the waste in the public sector would have gone unnoticed if there was a development component intended to generate jobs and sustainable growth. At the same time, private borrowing skyrocketed to unprecedented levels. In May 2010, Portugal's National Statistics Institute revealed that the average debt-to-equity percentage of companies was at 140%, debt that had not yielded commensurate results in sustainable growth and development to generate new jobs and higher incomes.

Portugal had slower growth than its southern European counterparts in the last three decades, and as a result of the recent global economic crisis GDP growth has come to a halt while public debt has mounted to the degree that it will be above 100% of GDP in two to three years. This would not be a problem as it certainly is not for Japan leading the world in GDP to debt ratio at 225%, if Portugal had development prospects like France or Germany, the two countries that determine the fate of the other EU members.  

Portugal, like Greece and Ireland, will surrender its sovereignty to the large banks and foreign investors which are the real beneficiaries of the current public debt crisis. Responsibility for the debt crisis in Portugal as in Greece and Ireland rests with the parasitic credit economy that encouraged debt policies as a scheme to generate greater profits for creditors without a component of growth and development. Bond speculators have now sent interest on the 10-year bond to just under 8% that is unsustainable for a country faced with unemployment above 11% and the slowest GDP growth in the EU along with Greece.

Why not default, given that the entire affair of financial insolvency is about bailing banks of debtor countries and transferring billions in interest payments to the banks and large investors of creditor nations. There are speculators betting not only that Portugal will default, but that Greece and Spain, perhaps Ireland as well, setting the stage for the eurozone's breakup. US investment firms have been buying credit default swaps (CDS) not just of Portugal, Greece, and Spain, but of Italy and Belgium and EU bank bonds.

Investment firms that jumped ship on Argentina when it defaulted in 2001 are also buying CDS for southern European countries, no matter the assurances of France and Germany about EU monetary solidarity. In many respects, Portugal, Greece, Spain, along with Ireland, Italy and Belgium appear to be worse off on paper than Argentina before the default, but Argentina was not part of a eurozone. But in this political game, everyone is gambling - those buying the swaps and those betting on EU bonds and the euro.

Ultimately, this financial crisis rests with political decisions of creditor countries invariably influenced by powerful banks that look at whether they are better off supporting the debtor nations or cutting their losses. In this political game, debtors have a lot more leverage than they realize. Although debt restructuring is unavoidable as much for Portugal as for Greece and Spain, perhaps Ireland, Italy and Belgium, default is out of the question for now because it would be too costly for all parties concerned, above all the creditors. If rapid growth - above 3% annually - does not come quickly and if the terms of restructuring are not such that they permit debtors to develop their way out of debt, investment firms betting on default will have a huge payday, while the Argentinian-style crisis across southern Europe would send the world economy back into another recession.

The market economy as it currently operates will sink this generation of Portugal's people as well as the next into downward mobility as a result of the debt crisis - a situation that also exists in Greece, Ireland, Spain and other debtor nations operating under the gun of creditors. A world economy based on hedge funds, derivatives, collateralized debt obligations, CDS (credit default swaps), structured investment vehicles, and other such parasitic investment schemes that derailed the world economy four years ago have not gone away. On the contrary, governments have not taken steps to prevent future crises, and for that reason only mega-defaults by several countries at once may send a sufficient shock into the system so that governments change course from remaining guardians of capital to protecting the welfare of all citizens.

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