Category Archives: Portugal

5/2/19: The Myth of the Euro: Economic Convergence


The last eight years of Euro's 20 years in existence have been a disaster for the thesis of economic convergence - the idea that the common currency is a necessary condition for delivering economic growth to the 'peripheral' euro area economies in the need of 'convergence' with the more advanced economies levels of economic development.

The chart below plots annual rates of GDP growth for the original Eurozone 12 economies, broken into two groups: the more advanced EA8 economies and the so-called Club Med or the 'peripheral' economies.


It is clear from the chart that in  growth terms, using annual rates or the averages over each decade, the Euro creation did not sustain significant enough convergence of the 'peripheral' economies of Greece, Italy, Portugal and Spain with the EA8 more advanced economies of the original euro 12 states. Worse, since the Global Financial Crisis onset, we are witnessing a massive divergence in economic activity.

To highlight the compounding effects of these annual growth rates dynamics, consider an index of real GDP levels set at 100 for 1990 levels for both the EA8 and the 'peripheral' states:

Not only the divergence is dramatic, but the euro area 'peripheral' economies have not fully recovered from the 2008-2013 crisis, with their total real GDP sitting still 3.2 percentage points below the pre-crisis peak (attained in 2007), marking 2018 as the eleventh year of the crisis for these economies.  With Italy now in a technical recession - posting two consecutive quarters of negative growth in 3Q and 4Q 2018 based on preliminary data, and that recession accelerating (from -0.1% contraction in 3Q to -0.2% drop in 4Q) we are unlikely to see any fabled 'Euro-induced convergence' between the lower income states of the so-called Euro 'periphery' and the Euro area 8 states.

5/2/19: The Myth of the Euro: Economic Convergence


The last eight years of Euro's 20 years in existence have been a disaster for the thesis of economic convergence - the idea that the common currency is a necessary condition for delivering economic growth to the 'peripheral' euro area economies in the need of 'convergence' with the more advanced economies levels of economic development.

The chart below plots annual rates of GDP growth for the original Eurozone 12 economies, broken into two groups: the more advanced EA8 economies and the so-called Club Med or the 'peripheral' economies.


It is clear from the chart that in  growth terms, using annual rates or the averages over each decade, the Euro creation did not sustain significant enough convergence of the 'peripheral' economies of Greece, Italy, Portugal and Spain with the EA8 more advanced economies of the original euro 12 states. Worse, since the Global Financial Crisis onset, we are witnessing a massive divergence in economic activity.

To highlight the compounding effects of these annual growth rates dynamics, consider an index of real GDP levels set at 100 for 1990 levels for both the EA8 and the 'peripheral' states:

Not only the divergence is dramatic, but the euro area 'peripheral' economies have not fully recovered from the 2008-2013 crisis, with their total real GDP sitting still 3.2 percentage points below the pre-crisis peak (attained in 2007), marking 2018 as the eleventh year of the crisis for these economies.  With Italy now in a technical recession - posting two consecutive quarters of negative growth in 3Q and 4Q 2018 based on preliminary data, and that recession accelerating (from -0.1% contraction in 3Q to -0.2% drop in 4Q) we are unlikely to see any fabled 'Euro-induced convergence' between the lower income states of the so-called Euro 'periphery' and the Euro area 8 states.

4/5/16: Canaries of Growth are Off to Disneyland of Debt


Kids and kiddies, the train has arrived. Next stop: that Disneyland of Financialized Growth Model where debt is free and debt is never too high…

Courtesy of Fitch:

Source: @soberlook

The above in the week when ECB’s balancehseet reached EUR3 trillion marker and the buying is still going on. And in the month when estimates for Japan’s debt/GDP ratio will hit 249.3% of GDP by year end

Source: IMF

And now we have big investors panicking about debt: http://www.businessinsider.com/druckenmiller-thinks-fed-is-setting-world-up-for-disaster-2016-5. So Stanley Druckenmiller, head of Duquesne Capital, thinks that “leverage is far too high, saying that central banks and China have allowed for these excesses to continue and it's setting us up for danger.”

What all of the above really is missing is one simple catalyst to tie it all together. That catalysts is the realisation that not only the Central Banks are to be blamed for ‘allowing the excesses of leverage’ to run amok, but that the entire economic policy space in the advanced economies - from the central banks to fiscal policy to financial regulation - has been one-track pony hell-bent on actively increasing leverage, not just allowing it.

Take Europe. In the EU, predominant source of funding for companies and entrepreneurs is debt - especially banks debt. And predominant source of funding for Government deficits is the banking and investment system. And in the EU everyone pays lip service to the need for less debt-fuelled growth. But, in the end, it is not the words, but the deeds that matter. So take EU’s Capital Markets Union - an idea that is centred on… debt. Here we have it: a policy directive that says ‘capital markets’ in the title and literally predominantly occupies itself with how the system of banks and bond markets can issue more debt and securitise more debt to issue yet more debt.

That Europe and the U.S. are not Japan is a legacy of past policies and institutions and a matter of the proverbial ‘yet’, given the path we are taking today.

So it’s Disneyland of Debt next, folks, where in a classic junkie-style we can get more loans and more assets and more loans backed by assets to buy more assets. Public, private, financial, financialised, instrumented, digitalised, intellectual, physical, dumb, smart, new economy, old economy, new normal, old normal etc etc etc. And in this world, stashing more cash into safes (as Japanese ‘investors’ are doing increasingly) or into banks vaults (as Munich Re and other insurers and pension funds have been doing increasingly) is now the latest form of insurance against the coming debt markets Disneyland-styled ‘investments’.

14/11/15: My Comment on Portuguese Political Crisis


Two comments from myself on the topic of Portugal's political crisis effect on country macroeconomic and fiscal positioning:
http://expresso.sapo.pt/economia/2015-11-12-Divida-espanhola-e-portuguesa-sob-pressao and http://expresso.sapo.pt/economia/2015-11-11-Juros-da-divida-portuguesa-descem.-Mas-preco-dos-cds-continua-a-aumentar.

Full comment in English:

Do you think the financial markets and the debt agencies will move its focus from Greece to Portugal now and later on for Spain near or after theDecember 20 elections?

The latest euro area ‘periphery’ political crisis - the collapse of the Centre-Right Government in Portugal - sets the stage for a potential replay of the logistics of the Greek crisis of Summer 2015 scenario.

Both the markets and European leadership are likely to present the crisis as an isolated event, linked to the lack of ‘programme ownership’ in Portugal and not indicative of the broader political and policy trends across the EU. In other words, all official players in the sovereign debt markets will attempt to paint Portuguese situation as a ‘one-off’ event with no risk of contagion to other member states. As a result, rating agencies’ downgrades can be expected only if the crisis persists or if the new Government includes the elements of what is perceived to be ‘extreme Left’. At the same time, the rhetoric surrounding political crisis will be shifted into the discussion of domestic failures and the allegedly destructive role of populist politics. The key to this approach is the clear desire by the European leaders to contain the spread of political opportunism and limit the extent to which democratic politics can transmit public anger and dissatisfaction with post-crisis recovery from one ‘peripheral’ state to another, namely from Portugal to Spain and Italy, as well as, potentially, to Ireland which is likely to face elections in the first quarter of 2016. There are strong incentives for European authorities to send a warning message to Spanish electorate and political elites before December 20th elections, albeit it is difficult to see how such a warning can be structured in the case of Portugal. In my view, we are likely to see renewed talks about Portugal’s compliance with fiscal harmonisation rules and, potentially, a warning concerning the risk of the country running excessive deficits in 2016-2017 on foot of political realignment.


How do you evaluate the present risk of Portugal regarding the debt sovereign market? Yields will go for new highs in 2015?

Currently, CDS markets are pricing in 15.5% chance of sovereign default (under ISDA2003 rules) for Portugal, up on 14.5% a week ago, compared to 3.5% for Ireland, down from 3.8% a week ago. The trend to-date suggests some increased pressure on sovereign risk position for Portugal that has been priced in since the appointment of the Centre-Right Government and this is consistent with a view that relatively sharp increases in government debt yields represent possible overshooting of risk valuations. Two critical aspects of the crisis in the context of debt sustainability view are: how long the new political impasse will last and what signals a new Cabinet will send after appointment. If the crisis continues over a relatively prolonged period of time (more than a week) and /or if the new Cabinet is slow in clearly defining its position vis-a-vis the European policy direction toward sustained fiscal and structural reforms, bond yields are likely to continue rising, putting pressure on Portugal’s access to new funding. Absent significant worsening of the political crisis, Portugal’s debt sustainability dynamics are likely to remain hostages to economic fundamentals: the rate and the nature of economic growth over 2015-2016, rather than to political risks.

Most likely, given the degrees of uncertainty relating to the political nature of the latest crisis, DBRS will take a ‘wait-and-see’ position, issuing negative watch warning on its ratings, but staying out of moving for an outright downgrade this time around. However, the risk of the downgrade remains significant and the impact of such a downgrade can also be material. Given that all major rating agencies have already downgraded Portugal Sovereign ratings, a DBRS downgrade will force the ECB to either halt purchases of Portuguese bonds in its QE programme or to issue a waver for eligibility criteria. In the former case, pressures on sovereign yields are likely to be severe making new issuance of debt much more costly proposition.


Note: DBRS did take a 'wait-and-see' position on Friday (see here)

25/10/15: Mess in Lisbon: Democracy is Complicated…


What on Earth is going on in Portugal? Here are some views:

1) By Ambrose Evans-Pritchard, the headline that says most of it: “Eurozone crosses Rubicon as Portugal's anti-euro Left banned from power” with a sub-head that says the rest: “Constitutional crisis looms after anti-austerity Left is denied parliamentary prerogative to form a majority government”. Key quote (emphasis is mine): “For the first time since the creation of Europe’s monetary union, a member state has taken the explicit step of forbidding eurosceptic parties from taking office on the grounds of national interest. Anibal Cavaco Silva, Portugal’s constitutional president, has refused to appoint a Left-wing coalition government even though it secured an absolute majority in the Portuguese parliament and won a mandate to smash the austerity regime bequeathed by the EU-IMF Troika.” Read the rest here.

2) By Chris Hanretty (University of East Anglia) sums up the facts about the President Silva decision that contrast with the common narrative that the President has forbidden Eurosceptic parties from gaining power. Read his points here.

3) And a view from Portugal’s president which clearly postulates the primary reason for his decision to re-appoint Prime Minister, Dr. Pedro Passos Coelho was the objective of ensuring continuity with Portugal’s commitments to the Troika and stability of policy formation. The considerations of democratic traditions and rules were instrumental to that primary objective.

4) So perhaps the better summary of the events unfolding in Lisbon is the more balanced report from Simon Nixon for the WSJ. “Undoubtedly, Mr. Cavaco Silva helped fan such talk with what even some of his own party concede was an ill-judged televised address in which he cited the need to maintain the confidence of markets and adhere to the country’s European destiny among the reasons for his decision. Yet the reality is that Mr. Cavaco Silva has acted fully in accordance with the constitution, which gives the directly elected president wide discretion in the appointment of the prime minister.”

And another fact that is beyond any doubt: Portugal’s electorate is split. Very seriously split. And there is little hope of consensus emerging any time soon.




































Source: http://visualoop.com/infographics/legislative-2015-all-numbers-wondering-about-elections