This Portuguese rescue then

I have to admit that there\’s a bit that I don\’t understand in all of this.

Why not default?

OK, so, Portugal owes more than it can repay on its own. This isn\’t an unusual situation, countries have done this many times before.

OK, so I can see that leaving the euro would be bloody difficult (even if I do think that\’s the only viable long term solution). And I know that default would lead to various banks elsewhere in Europe possibly falling over. So I can even see the merit of delaying default for a couple if years so that said banks can build up proisions against said default.

But here\’s the bit I\’m really not getting. We seem to be being told (not so much specifically, as it\’s just a general assumption) that default would mean the end of the euro. And that\’s the bit I just don\’t get.

Why would it?


15 thoughts on “This Portuguese rescue then”

  1. Because the Euro is such a daft idea that They are frightened that the least upset might destabilise it to death?

  2. …because the Euro is a politicians vanity dream and sooner or later the real world is going to break it…

  3. Mathematically, if the weakest member goes, the average strength of the euro rises. I can’t fault your maths, Tim.
    But the markets aren’t betting that way, they are in the fortress europe psychology too.

  4. Of course default would not put an end to the euro. For Portugal to do it it would have to be done very gradually. You just might see Portugese civil servants being paid in “new escudos” and a law passed that they have to be accepted 1:1 with the euro. California’s done it, why not Portugal?

    The mistake that was made at the beginning was not recognising that a common currency actually increases the risk of sovereign default by taking away the printing presses. There was a rather cavalier assumption that the Maastricht criteria would be kept to, and almost no one kept to them.

    Having your own currency and printing at will (the Bank of England/Federal Reserve solution) is really just a sly way of defaulting. At least if Portugal does become unable to pay, it will have to own up to it. The rest of us care because this is an issue only as long as the government needs to keep issuing debt (to pay teachers and stuff). So it’s ultimately the lack of plan for getting back into surplus that makes it impossible for a government to raise cash.

    The only serious risk of an “end to the euro” because of sovereign debts comes from Germany. If the German government considers it cheaper to reinstate the Deutsche Mark and recapitalise all its banks holding periphery debt with new fiat instruments, it will do it. The fact that Germany also carries huge mountains of euro-denominated debts might also tempt Merkel to burn the euro. The scenario here is of course for a massive upward revaluation of the new Mark which would seriously damage Germany’s export-dependent economy.

    So, I can’t see pulling out of the euro being the correct decision for any country – whether centre or periphery. But as there are politicians involved, one should expect very wrong decisions to be made.

    Four things need to change. The ECB needs to be unambiguous in its support for commercial banks threatened by sovereign default (but tread a fine line because this might encourage irresponsible lending), Europe’s commercial banks need to operate across the continent so a future default by government of country X doesn’t become a political issue in other countries with badly-exposed commercial banks, and the expectation of interest rate convergence between government bonds needs to die. We can have one currency and more than one interest rate – indeed in a true market for money what the ECB says should be almost completely irrelevant. Finally, an orderly default mechanism that keeps a country functioning while putting government finance on a trajectory towards surplus is needed. It’s too late for the current round of sovereign issues, but we should be prepared for next time. We don’t have printing presses in the eurozone any more, we need another, more honest way out.

  5. Is it a more mundane reason than worries about the future of the Euro? I’d guess that it is easier to default on your current debts if one doesn’t need to borrow even more money for current spending.

  6. While you’re at it, can anyone explain why it is in ireland’s national interest to maintain the guarantee on its banks’ bonds?

    Tim adds: It isn’t and it never was. It’s in the Uk’s interest, France’s, Germany’s, but not Irelands. That guarantee is quite possibly the most stupid thing anyone has done in this little crisis.

  7. Ensuring Ireland (or any other country) retains a functional banking system – through liquidity when needed, depositor guarantees, that kind of thing, should be the responsibility of the central bank, not the national government. A central bank can keep an entirely financially screwed commercial bank functioning as long as necessary to ensure that the payment system does not collapse, and then wind it up gradually. Instead what happened is the small government of a small country had to take on all of those real losses (made on deals globally as well as overpriced riverside apartments in Dublin), and this is the main reason the Irish government is in financial trouble.

  8. Why not default? Because all of your obligations, even the ones that weren’t due for repayment will become due and payable immediately and (a) the banks will hound you for every penny you can give them, (b) the banks will refuse to fund you any more (which you will need even if you plan to pay down your borrowings because some of them will need refinancing all the time) and (c) you will trigger penalty clauses that makes your outstanding loans even more expensive. Your liabilities don’t go away just because you default, and until you do repayt the capital markets will be closed to you, which will kill off your whole public sector.

  9. “It isn’t and it never was. It’s in the Uk’s interest, France’s, Germany’s, but not Irelands. That guarantee is quite possibly the most stupid thing anyone has done in this little crisis.”

    Not stupid – treachery….

    Brian Cowen sold the Irish people down the river for his mates in the EU…

  10. The Euro was always a political project intended to promote closer European integration. So when the commissars talk up the dangers of a default they are trying to ensure that no country ever leaves the Euro, because for them even a temporary reversal of the process of integration is unthinkable. When the eurosceptics talk up the possibility of a Portugese default destroying the Euro and fatally weakening the EU they are engaged in wishful thinking. When the media do so it’s just their normal sensationalism.

  11. I dunno if Portugal leaving the euro would cause it to collapse, but I suspect the people who run the euro fear that it will.

    My guess is that they know that their pet vanity project is actually a house of cards and they live in terror of the day one card falls out of position.

    Oddly enough, if this is true, it is probably a more damaging indication of the euro’s inherent problems than the problems faced by the piggies.

  12. “California’s done it, why not Portugal?”
    California issued script, but they couldn’t force anyone to cash it (to the vast annoyance of vendors who were paid with it), much less at 1:1.

  13. You main mistake is to go along with what ‘They’ want you to believe:

    “OK, so, Portugal owes more than it can repay on its own….”

    Maybe it can, maybe it can’t. I suspect it very much can, but either way, what the EU-banking-Home-Owner-Ist cartel want is for the Portuguese government to keep squeezing every penny out of its citizens and hand it over.

    It simply would not do for another small country -like Iceland, for example – to tell exercise its national sovereignty and to tell all the rent-seekers to f- off.

  14. But lending money to someone isn’t rent seeking. The Icelandic government was quite right to tell the creditors of private institutions that happened to be headquartered in Iceland to fuck off. It’s not entitled to tell its own creditors likewise.

  15. James is right here. There’s a big difference between Ireland and Iceland, where the problems were with private sector banks, and where the debts should have been reneged on (except for the Icelandic government’s responsibility to compensate small under the bank guarantee scheme, but that’s another story), and Greece and Portugal, where the problem is that the government borrowed the money, wasted it, and now doesn’t want to pay it back.

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