Exactly one year ago today, on May 17, 2011, Portugal was bailed out by the EU and the IMF, which came up with 78,000 million euros for the Socialist government of Jose Socrates. The government had asked on April 7 for the intervention, in return for which it undertook a rigorous plan of adjustment and reform. A month later Socrates was voted out and the incoming centrist Pedro Passos Coelho, with the support of the opposition, prepared to honour the bailout terms. Since then Portugal has increased direct and indirect taxes, cut the salaries of public employees by over 15 percent, reduced expenditures on health and education and slapped a freeze on new infrastructure. In consequence, unemployment hit a record high at 14.9 percent of the workforce.
Not so bad, afterall
This first quarter, however, has surprised everyone with a drop in GDP of only 0.1 percent, much lower than expected thanks mainly to the foreign sector. Portugal is still in recession, but its citizens have begun to detect at least that the decline is being braked. Greece is the opposite case: after two years of a rescue plan, it has made little progress on reforms. Its political class is showing signs of severe irresponsibility, while its citizens are growing exasperated at seeing their sacrifices come to nothing. And while Portugal has stepped out of the sights of the markets for now, Greece is keeping the entire European Union in suspense.
The two countries perfectly illustrate the difference between complying and not complying with one’s obligations. The path of adjustment and reforms chosen by the Mariano Rajoy government since taking power is the only path possible, though the swings of the markets do sometimes place it in doubt – which is just what is happening now, as uncertainty over Greece’s future in the eurozone has driven the risk premium up past the 500 mark for the first time in history and the stock market has sunk back to mid-2003 levels.
A “loud and clear” message
In Congress yesterday, Finance Minister Cristobal Montoro repeated that “either we make the adjustment or the markets will make them for us.” There is nothing else, and above all, there is no going back. Only this way can we expect help from the EU and the ECB. This is the context in which we must understand the complaints of Montoro and of Rajoy himself in demanding more decisiveness in Brussels and Frankfurt in defending Spain. The Prime Minister yesterday called on the EU for a “loud and clear” message in defence of the euro and of the “soundness of sovereign debts.” Specifically, he referred to the “serious risk” that the markets would stop lending to Spain or lend only at “astronomical” rates, which would paralyse the financing of the country and of some companies and financial institutions that are already having a hard time getting credit.
The government’s message to the markets, in effect, was that the ECB will act to defend Spanish debt only when the premium exceeds 500 points. This prompted a swift fall in the price, which closed out the day at 482 points. The Executive is right to complain, since the Spanish economy cannot possibly cope with such a high spread with German bonds over a longer time.
At the same time, however, the government must recognise that having such a high risk premium is still our own fault, and it will not fall until markets feel that the reforms are having an effect. In this sense, the forced nationalisation of Bankia has been a step backwards since it has revived doubts about Spain’s financial sector. Today, though, we may be able take a leap forward if Spain’s Fiscal and Financial Deficits Council reveals that the regions are truly beginning to get a handle on their deficits.
View from Lisbon
Waiting for more bad news
Just prior to this weekend’s G8 summit in the United States, where the Eurozone crisis will be discussed, Jornal de Negócios notes that -
It is normal that the Greeks speak like madmen - after all, they are on the verge of a catastrophe. It is not normal that the EU acts like they have the situation under control - after all, the EU is on the verge of a catastrophe. (...) In Portugal we have stopped in our tracks, watching from a distance what will determine our future. We watch the markets as if listening to a match on the radio that we fear we may lose. (...) It's time to leave the beach, replace the Martini with herbal tea. In recent days, the cost of debt of countries like Spain and France hiked. (And Portugal followed suit)."
The Lisbon daily also believes that Europe is not acting on the basis of solidarity, but reacting to incentives, and raises some questions-
Will the single currency prevail? Is there money to help Spain? And if Spain falls, will it shake Italy, France, and the entire building? Will the "firewalls" that sterilize Greece prevent contagion and protect Portugal? Can Greece exit the euro and remain in the EU? These are the questions. Today. Forever. (...) And again we are afraid of Sundays, the day reserved to break the worst news."