Problems mount again for the public finances of Portugal, Ireland, Spain and Greece

Today I thought that I would look again at the public finances of the peripheral euro zone countries as there have been some developments this week. I wrote on Tuesday about the deteriorating state of Greek public finances and concluded that in my opinion Greek is in effect insolvent and that the situation is getting worse. So she is becoming even more insolvent. This may not seem important as you are either insolvent or not but remember that any such view depends on thoughts about the path for economic growth, interest rates and inflation as I discussed in my update on the UK public finances yesterday and these are unknown and variable. So the situation for Greece is that for her to escape her apparent destiny something even more extraordinary will have to happen such a perhaps cold nuclear fusion being invented as a realistic proposition.
Greek statistical discrepancies have emerged again
Today is likely to see an update on her fiscal and national debt position from the EU/Eurostat and the figures it produces according to the leaks in the Greek media are likely to show that yet again Greek statistics have been in error. The leaks suggest that the estimate of the fiscal deficit will rise from 13.4% to 15.5% or so and the ratio of national debt to Gross Domestic Product from 115% to 127%. I will update when the actual figures are produced. The articular period which caused these problems was 2006/09 according to Eurostat.The net effect of these new concerns is that the yield on Greek government debt has started to rise again. Her ten-year government bond yield had dipped below 9% for a while and I reported it was 9.09% on Tuesday, but now it has risen to 9.3%. In spite of the recent promises of Chinese and Norwegian buying the situation is worsening again and Greece’s return to world bond markets looks to be pushed ever further into the future. She is currently issuing only short-dated debt. In terms of developments the rail strike that is planned for four of the five weekdays next week is unlikely to help sentiment much particularly as the strikes in France appear to be long-lasting and attracting a lot of media attention which may spill over into coverage of the Greek strikes.

Ireland and her banks: Anglo- Irish makes a move on its debt holders

There has been a lot of debate as to what Ireland should do about the holders of subordinated and non-subordinated debt in her banks. For those who have not been following the story Ireland has been forced to pump ever-increasing sums into her banking system but holders of such debt in Irish banks have not been taking their share of the pain. This has to two lines of accusation. The first is cronyism with Ireland’s political system and that does seem to have been evident at times. The second is that other banks in the euro zone are also involved as holders of such debt and some have suggested that in return for EU help Ireland may have promised not to hurt these banks

Either way the failure of bondholders to take their share of the pain has been a feature of Ireland’s difficulties. Yesterday that changed as Anglo-Irish bank offered 5% payment on what is called Tier one or highest risk bonds and 20% payment on what is called Tier 2 or slightly lower risk bonds. This was then added to by a statement which said that there would then be an EGM and if this voted in favour then those who vote against will get nothing at all. As you can imagine this has rather stirred up a hornets nest!

One suggestion is that these “mutually advantageous talks” may be illegal and matters have gone so far that the Irish constitution has been invoked. I am not a lawyer but Article 43 seems relevant although I will be interested to see if any lawyers read this and whether they think that 2 or 2.2 is more relevant here.
In essence the problem here is that such moves should have taken place some time ago as this type of debt is supposed to share in any pain. The allegations of cronyism hit hard here and it is not to the credit of Ireland’s political class as there is already suspicion that some may have been able to exit these bonds at much better levels. To move now whilst its supporters call it “innovative” may indeed be innovative in that it is a sovereign in effect acting in a possibly illegal manner.

Looking at this further there may be another problem. There is a market for credit default swaps or CDS’s and these should be triggered by what is called a credit event and this looks like a credit event to me. To put this another way the whole CDS market is likely to be called into question if investors can be treated in this way without them paying out.

Fears over what all this “innovative” action might cause have led to Irish bond yields rising strongly again and they rose by 0.2% yesterday to 6.5% for her ten-year government bonds. The potential problems include whether investors might avoid Irish debt in future due to fears about being treated in an “innovative” manner. Also it reminds investors again of Ireland’s underlying fiscal problems as the Economic and Social Institute has just published some worrying figures for the future path of the Irish economy which involve estimating a further 4 billion Euros of fiscal austerity in the emergency budget due in November.

Spain and her troubles with her economic statistics

I wrote on the 1st of October about concerns that exist over Spanish economic growth figures and in particular concerns about them having been overstated. Unfortunately there are also now concerns about the property statistics produced by the Spanish National Institute of Statistics (INE). It recently produced statistics which indicated that Spanish property prices had risen in the second quarter of this year. This reversed a three-year trend and allowed Spanish Prime Minister Mr. Zapotero to give interviews suggesting that the market had bottomed. Those who follow the Spanish property market simply did not believe the figures and their disbelief will only be added to by the fact that the Tinsa price Index showed that house prices fell again in September and at an accelerating rate. The annualised rate as recorded by this index is now at -5%.

An additional development this week has been that a small Spanish town has suspended all payments bar essentials. Whilst Villajoyosa is not large and in itself is a small section of Spanish economic life it has reminded everybody of the way the Spanish system has devolved a lot of expenditure to towns and regions. These towns and regions do not appear to have been following the central governments austerity mantra as the regions have increased their debts by 25% over the last year according to the latest Bank of Spain data.

So these troubling developments have led to Spain’s ten-year government bond year edging higher again.It has been holding steady at or just above 4% and has now risen to 4.2%. Spain issued some 3.85 billion Euros of new bonds yesterday and this appeared to unsettle the market when combined with the worsening news.

Portugal and her economic problems

Any analysis of Portugal ahs to start with the sad but not well understood fact that she has suffered from her own “lost decade” featured by low growth,problems with unemployment and emigration. Accordingly the credit crunch has hit hard and I analysed the implication for Portugal in articles on the 24th June,14th May,5th May amongst others.

Problems appeared to be mounting again recently when Portugal’s public finance statistics revealed that rather than reducing the fiscal deficit was in fact increasing! This was a bit more than just a presentational problem and Portugal was plunged back into crisis again. Her government’s response was to introduce (yet) another austerity package designed to cut the budget deficit from a record 9.4 per cent of GDP last year to 4.6 per cent in 2011. The package is planned to be two-thirds spending cuts such as reductions in civil service wages averaging 5% and pension reforms and one-third tax increases such as a rise in Value Added Tax by 2% to 23%.

Portugal’s government keeps telling us that its deficit plans are front-end loaded but her statistics keep failing to back this up. Now the new plans have not been passed by Parliament yet but even so it is troubling that the latest official figures released this week show that on a year on year basis  Portugal’s central government deficit widened by 200 million Euros in the first nine months of 2010  compared with 2009. Her attempt at austerity was sabotaged by income tax revenue falling 7.6 % and social security spending rising by 6 %.

We are back with a problem which Portugal has faced for quite some time her inability to maintain any sort of economic growth even in the good times has obvious implications for these more difficult times. The tough austerity budget plans led to a fall in her government bond yields of around 1% but can she implement them? In spite of an extraordinary gain of 2.6 billion Euros from transferring the pension funds of Portugal Telecom to the state Portugal is still unlikely to hit her targets for this fiscal year. Accordingly the improvement in her government bond yields is ebbing away and they rose by 0.15% yesterday to 5.92% for ten-year bonds.


We are seeing a push-me pull-me situation for government bond yields in these countries. The economic problems from which they are suffering mean that they offer sovereign yields for what are considered to be first-world sovereign nations which are higher than elsewhere. So bond funds looking for yield in a world where yields are generally declining are likely to buy at any time of perceived improvement. However,it is my sad duty to note that the perceived improvement seems to be invariably followed by a deteriorating reality.


12 thoughts on “Problems mount again for the public finances of Portugal, Ireland, Spain and Greece

  1. Hi Shaun,

    thank you for the timely analysis.
    Don’t hold your breath for Eurostat’s updated report on Greece today. The Greek press has been reporting for a while that the release has been postponed for mid-November. See for example yesterday’s Kathimerini,

    From other press reports over the past week, the reason for the delay appears to be an attempt to get it almost about right, that is, for everyone involved to more or less agree on the numbers. The noble goal seems to be to release numbers that will not keep being revised a lot again and again and again.


    • Hi John
      I had checked on Tuesday and was told that Friday was still the day so I guess I must have just missed the change. I have to confess that it hadn’t occured to me that the date might be changed at such short notice. The fact that they are still not sure makes me think of that Vanity Fair article and its implications..

  2. I envision that out of bank bond defaults like those of Anglo Irish Bank where some bond holders are not paid in whole by the national central bank, and out of a continuing falling, FXE, from 138.78 will result in further stock deflation, and then a stock liquidity crisis will emerge, where there will not be enough buyers for sellers of bonds as well as stocks, causing small business failures and banks to become sorely decapitalized, resulting in the president of the ECB arising to be an “Eurozone credit seignior” and provider of liquidity to Europe. Despite my report that the Deauville Task Force Fails To Provide A Framework Agreement For European Economic Governance, I also believe that framework agreements will be announced in Europe providing for fiscal federalism giving a whole new meaning to the term European Economic Governance. Yes, I foresee a greater fiscal union. Fiscal federalism will result in the Eurozone evolving into a region of global governance where national sovereignty is a concept of a bygone era.

    The word Segnior comes from old English and means top dog banker who takes a cut. Many Europeans will come to trust in him, and conduct their economic affairs through him, as he will oversee all banking, lending, credit and investment throughout the entire Eurozone. The word, will and way of the Seignior will be the law of the Continent.

  3. Re the town hall debt in Spain. Yes, it has gone up and things are getting desperate in many places. In ‘my’ part of Spain, the regional government has taken to issuing revised property tax bills for the last three years, payable in full immediately even though there is ample evidence that the bills were originally paid on time! Eventually… the original amount will be paid, though not of course the new retrospective increase, which is chunky. Insiders tell me the repayments are scheduled for 2 years’ time. We’ll see, no breath being held around here.

    Of course there is a reason for this, it’s the unemployment pay, very generous for the first 18 months, and financed locally. Borrowing capacity has been reached. Creative finance is not limited to the City! The unemployed of the UK would quite like the level of unemployment pay that the Spanish enjoy, at least for a while. Then they default to an amount which is also above the UK’s JSA.

  4. Cary, thanks for the local report. It seems that history is repeating itself.

    Fred Sheehan in article Municipal Deflation: Consequences of the Greatest Speculation, relates: “This was speculative building on a grand scale, as Professor Herbert D. Simpson of Northwestern University informed the Forty-Fifth Annual Meeting of the American Economic Association in 1933: “Throughout this period there was another form of real estate speculation, not commonly classified as such, but one that has had disastrous consequences. This is the real estate ‘speculation’ carried on by municipal governments, in the sense of basing approximately 80 per cent of their revenues upon real estate and then proceeding to erect a structure of public expenditure and public debt whose security depended largely on a continuance on the rate of profits and appreciation that had characterized the period from 1922-29.”

    “Simpson delivered his paper at the bottom of the Depression but the number of beleaguered municipalities kept rising until 1935, when there were at least 3,252 municipal issues in default. There are at least three reasons to think current municipal problems will be worse. First, the latest real estate bubble has probably been much bigger and more leveraged than in the 1920s. Second, expenses are not as easy to cut. The earlier retrenchment was not hamstrung by bloated government retiree pension and health benefits. Third, property assessments lag current prices. This promises to be a fierce battle. Towns want to hold the status quo so are in no hurry to tax properties at falling market values; residents do not want to fund comfortable teacher retirements when they are wondering what happened to their own pension plans.”

    So we have in Spain, another repeat of the 1929-1932 developments, which of course will end in disaster. The chart of Spain, EWP, courstesy of shows a double top coming in at 43.37.

    Kelly Olsen, of the Associated Press reports Group Of 20 Vows To Avoid Currency Devaluations And Reduce Imbalances To Boost Global Growth and relates: The grouping, which accounts for about 85 percent of the global economy, said in a statement that it will “move towards more market determined exchange rate systems” and “refrain from competitive devaluation of currencies.”

    The agreement comes amid fears that nations were on the verge of a “currency war” in which they would devalue currencies to gain an export advantage over competitors — causing a rise in protectionism and damaging the global economy. “Our cooperation is essential,” the statement said. “We are all committed to play our part in achieving strong, sustainable and balanced growth in a collaborative and coordinated way.” The meetings come ahead of a G-20 summit in Seoul set for Nov. 11-12 when leaders will consider the agreements reached by the finance officials as well as other proposals for strengthening the global economy.”

    My comment is that the statements from work group of the world’s finance ministers, were simply rhetoric. It is the currency vigilantes and bond vigilantes who now have the upper hand in determining the value of currencies, and I believe we are going to see global currency devaluations, in response to the US Federal Reserves QE 2 debt monetization, before the November 3, 2010 FOMC meeting.

    The only person of true and insightful vision at the G20 metting was Oili Rehn, economic and monetary affaires commissioner of the European Union who said: “It is a milestone in reforming global governance,” … “Today we have been rebalancing global growth and rebalancing political influence in global governance.” Perhaps Mr Rehn will arise to be what I refer to as the “Eurozone credit seignior”, the top dog banking, investment and credit official in Europe, the One who’s word, will and way will be the law of the continent.

    Yes, great turmoil, and destruction is coming to Europe, and out of that chaos, will come order, introduced and enforced by The Seignior.

    • Looking at the local press in Spain, there is considerable scepticism about the economic pronouncements of the ailing Zapatero socialist government. In fact, the government is under severe pressure. Bluff is the name of the game, to cover massive structural unemployment and a truly disastrous housing market that will in time destroy the banks that financed the bubble. There simply isn’t the demand for the product and at a guess, I would say there are at least 10 years of new housing stock at the current rate of sales. Full recognition of the ‘morisidad’ of the debts on the banks’ and savings associations’ balance sheets has yet to occur, but at least the government has been talking about forcing the issue out in one year, rather than allowing it to dribble out over 6 years, the previous dubious practice. I bet Elena Salgado is not thinking about changing that rule just yet, though! The bluff must be maintained…
      I find it astonishing that Brussels, with all the leverage that it has with its huge and ongoing subsidies to Spain, has not found the time to ‘harmonise’ the accounting standards for banking. At the very least the full recognition of potential losses as and when they are diagnosed should be mandatory.

  5. The G20 meeting is a sham. Benny and the InkJets are about to be unleashed to the tune of another trillion (a 50% increase to the $2 trillion monetary base), though much of this has been cooked into the markets already. The G20 meeting will not change this. The problem with currency wars is that somebody, somewhere has to lose. In these opening stages, the EU, Japan and the Swiss have been flat footed and watched painfully as their currencies rise vs the USD and CHY. But the ultimate loser will be, of course, the average serf in America, who’s gas and food prices are set to skyrocket. Add in the elimination of the Bush tax cuts and 2011 begins to look grim indeed. But not as grim as for those extremely overleveraged EU banks. Greece, Portugal and Spain simply cannot pay.. and nobody has the courage to mention the word “haircuts”.

  6. Yes, Mr. Kowalksi, you have it right; monetization of sovereign debt has in the past led to terrible commodity inflation. One can take a look at the chart of food commodities, FUD, on my linked article to see that the these are only now beginning to rise. Just think how high they will rise when the average investor and institutional investor pile in.

    Yes, the average person in the heavily indebted developed nation such as Ireland, the UK, the United States and Japan, will be at the epicenter of suffering, compared to the less indebted emerging country like Chile or Peru or Thailand. And to make it worse, many of America’s small companies are poorly capitalized; these Russell 2000, IWM, $RUT, companies are highly dependent upon companies like American Express, AXP, and Nelnet, NNI, and others in the financial sector for financing to meet payroll, buy inventory and cut accounts payable checks. Now the 30:10 US Sovereign Debt Yield Curve, $TYX:$TNX is rising. This was once a good thing for investors; but since October 7, 2010, the rising sovereign debt yield curve, is making it more expensive for corporations to borrow and is punishing terribly those ivested in the longer out corporate debt like BLV. Those invested in junk bonds, JNK, have been helped by the announcement of QE 2, as it implies liquidity, well temporary liquidity, and liquidity was abundant this week with the spigot of yen carry trade investing still supporting stocks, ACWI.

    For now the European Financial Institutions, EUFN, are on life support from the ECB. Investors are well aware of the dependency of Portugal, Italy, Ireland, Greece and Spain banks upon the seigniorage grace of Mr. Trichet.

  7. Yen Guy: “Just think how high they will rise when the average investor and institutional investor pile in”

    Indeed.. but this is a double edged sword. At some point, the serfs will be forced to make unwelcome decisions: things like travel, shopping mall excursions and durable good purchases will be hit, and hit hard. Credit Card and other unsecured debt default rates will skyrocket. Foreclosures will rise again. To cushion the blow, banks will again begin to stash money in the vaults, denying loans to all but the most creditworthy. In other words, it’s going to be time for QE3.. only this time, it might bring on a currency crisis.

  8. Howdy,

    The situation in Greece seems a bit volatile, as usual. While distinguished economists and commentators continue proclaiming that “some sort of default or restructuring will take place”, the media appear to cover the relative drop of Greek bond spreads in the recent weeks rather fervently.

    Furthermore – The date chosen by the Eurostat and troika to announce the Greek financial results is NOT random. Monday, November 15th, is the first day following the second round of the municipal & county elections taking place here.

    If an announcement of “worse-than-expected” results came now, it would presumably hurt the Government, while anything coming after an elections day (even not national elections) is “easier to swallow”.

    Regardless, while there are no riots on the streets per se, there is a sentiment of mounting fury regarding the MoU signed with the troika – At the moment, no political party or organization seems to capitalize on this fury, the entire status quo seems unable to provide meaningful proposals.

    At the moment, we wait and see what happens. As always, I will keep you updated (as long as I remain in the country, anyhow).

    • Hi Ioannis

      Thanks for the update. Over in the UK the emphasis for civil disorder has mostly focused on France with what is happening there.

      As to government bond yields after an improvement which you can put down to the ECB,Norway, China or a search for yield in a world where many countries such as the UK have low yields the trend has turned upwards again recently. One can debate the reasons for the ebbs and flows but as I have pointed out shorter-dated Greek paper within the terms/maturity of the EU/IMF aid package should be a lot lower in yield terms and higher in price terms. So much for politician’s credibility I guess…. People are willing to talk the talk but not put their money there.

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