Today is the day when Portugal returns to the financial markets to raise some money as she plans to auction some 1.25 billion Euros of bonds split between a 3 1/2 year maturity and a 9 1/2 year maturity. This is important for two reasons firstly it sets a tone for 2011 when there is a lot of concern over deficits and their financing and secondly it is the first issue Portugal had made of longer-dated paper in this phase of her crisis when her government bond yields have been increasingly elevated. Put another way what happens today will affect Portugal’s deficit going forwards as the yields on these two bonds will have to be paid for the term of the bond. A primary issue like this can be a real cost to a nation as in such circumstances as this the bond or bonds are issued with a higher yield which has to then be paid each year by Portugal’s taxpayers. In itself one issue will only have a small influence on the fiscal deficit but it gives implications for the rest of the 20 billion Euros of debt that Portugal needs to issue this year.
A Response by Jose Socrates Portugal’s Prime Minister
Such facts are likely to be known by Portugal’s ruling politicians and it was no coincidence to hear these words from her Prime Minister yesterday “The country is doing its job and doing it well. Portugal will not request financial aid for the simple reason that it’s not necessary”. Those who have followed the Euro zone crisis will be used to such statements full of hyperbole and they will also realise that in reality they are about as effective as a football club chairman declaring a vote of confidence in his manager! However Mr. Socrates went on to say this, “The budget deficit will clearly be below forecast.”
Now we had something based hopefully in fact which contradicted the pattern for Portugal in 2010 and of course came the day before an important event so I took a look at the numbers. According to Mr. Socrates,Portuguese government revenue rose more than forecast last year and spending gained less than predicted and this meant that the government ended the year with 800 million euros more than it projected. The breakdowns of the figures were as follows, public expenditure rose by 1.7 % in 2010, less than the 2.5 % forecast, and revenue gained 5.3 %, more than the 4.5 % predicted.
This happy and convenient state of affairs does however sit oddly with the pattern of Portugal’s fiscal position for 2010. You see back on November 23rd when I looked at Portugal’s finances for the first ten months of 2010 I reported this.
In the first ten months of 2010 Portugal’s fiscal deficit has widened with public expenditure actually being some 2.8% higher than the comparable period in 2009! This meant that Portugal’s core state deficit rose to 11.885 billion Euros in the first ten months of 2010, which compares with 11.67 billion Euros in the first ten months of 2009. As these figures keep repeating they correspondingly reduce the credibility of Portugal’s government.
If we break down the figures we saw public expenditure rising by 2.8% which was more than but unable to be fully offset by a rise in tax revenue of 4.6 %. If we remember that this was for ten of the twelve months in the year then Portugal must have had a fairly solid rise in its tax revenue in the last 2 months for its rise in the whole year to be 5.3%. As the increase in public expenditure for the first ten months of the year had been driven by increases in debt expenditure then the performance in terms of expenditure is an even better performance as of course debt expenditure will be under upwards and not downwards pressure.
Portugal’s Central Bank reports somewhat grimly on her economic position in 2011
If one wishes to be kind to Mr. Socrates then one might take the view that he was trying to offset a very downbeat report from Portugal’s Central Bank. It predicted that The Portuguese economy would shrink by 1.3% this year before returning to growth but at a rather anaemic rate of 0.6%, in 2012. The expected recession in 2011 would represent a swing of 2.6 percentage points in GDP from estimated 2010 growth of 1.3% so it would be felt as quite a slowdown. It went on to say.
This development is marked by the process of adjustment of accumulated macroeconomic imbalances and, in particular, by a significant budget consolidation which underlies it.
Having said this myself on here this week I can hardly disagree with this and it goes further as it says that risks are “strongly” to the downside. It worries that any global slowdown could affect Portugal’s exports and might cause the Portuguese government to tighten further. Also it has concerns about the reliance of Portugal’s banks on the European Central Bank.
In addition, the projections assume that recourse to Eurosystem (European Central Bank) refinancing will remain significant throughout the (forecast) horizon, in a context of the persistent difficulties faced by Portuguese banks in accessing wholesale market funding.
Another interesting feature was the way that the Portuguese Central Bank called for “comprehensive and solid” structural reforms of the Portuguese economy. Not only does it want reform of the states public finances but it also wants a change in priorities “promoting a rethink of spending and catalyzing a lengthy discussion of the state’s role in the economy.”
It would appear that the Portuguese Central Bank has a much more realistic view on Portugal’s finances and economy than her Prime Minister. There has been a debate over the accuracy of Portugal’s fiscal statistics as it is and such convenient improvements are unlikely to raise credibility. An example of this was a speech given by the leader of the opposition SDP party that I reported on back on the 23rd of November.
The state has for many years been removing from the budget a series of activities, which has made a large part of our numbers fictitious……He said that the “true” total public debt stood as high as 112 percent of GDP, while the budget deficit should be at 9.5 percent of GDP, far above the minority Socialist government’s target of 7.3 percent for the end of the year.
Be that as it may the Portuguese government bond market found support from the European Central Bank again yesterday and its buying managed to get her ten-year government bond yield to close just below the crucial 7% level. As its announced holdings of peripheral Euro zone debt now total some 74 billion Euros it would only be a small increase to support this issue but this would be an even more dangerous road as it raises the prospect of monetising government debt.
For today the crucial number is 5.8% as this is the average interest-rate at which Ireland was able to borrow at from the EU/ECB/IMF troika and it is this that should be compared with the interest-rate at which Portugal can borrow today.
Greece auctions some short-term debt
One illustration that a rescue package is a long way from a panacea for a crisis came from Greece yesterday. She auctioned just under 2 billion Euros of 6 month Treasury Bills and paid an interest-rate of 4.9%. If we stop and think we can see that Greece is under a rescue package effectively backed by Germany’s credit rating and yet if she borrows for 6 months she is having to pay some 4.4% more as an interest-rate than Germany would have had to.So whilst commentators can debate Greece’s position and whether such an auction is relatively better than the last the reality is that investors are unwilling to lend her money at an interest-rate which would indicate they feel the bail out is credible and remember they are only loaning the money for 6 months! This is a rather damning conclusion of the rescue package and its credibility.
If we simply look at the absolute interest-rate paid we are left with the view that Greece remains solidly insolvent and if anything it is getting worse and not better. So I am afraid that the lesson here for Portugal is that the bailouts so far have been something of a poisoned chalice.
World inflationary trends continue to build
I feel that 2011 will involve both deflationary and inflationary trends at the same time and the pattern for the year will be the clash between the two. I have written already today about a deflationary influence the Euro zone and its troubled periphery. However some inflationary issues are building too in a combination which is unlikely to do anyone any good.
If we look at commodity prices they are rising again and continuing the trend of the latter part of 2010. The Commodity Research Bureau spot index rose yesterday by just under 7 points to 532.53 with fats and oils the strongest component. It only feels like yesterday that I was writing about it breaking the 500 barrier. Added to this the oil price which has been very volatile of late has risen to US $91.55 for a barrel of West Texas Intermediate crude this morning following oil supply problems in Alaska. This means that since the beginning of September 2010 the oil price has risen by over 27%.
Bob Diamond and the Treasury Select Committee
There appears little doubt that the Chief Executive of Barclays Bank ran rings around his political opponents yesterday. I suppose if you have one group desperate to appear strong,decisive banker-bashers when in reality they have done nothing of the sort versus a man who feels a good performance might allow him to boost his already high remuneration then there was only one likely winner. Indeed such an element of fantasy pervaded proceedings that Mr.Diamond was even able to get away with claiming that banks should not be automatically bailed out when of course his actual strategy relies on assuming they will be! Heads I win and earn a fortune, tails I go back to New York a wealthy man and leave the problem to the UK taxpayer…..