Tag Archives: Portugal

Commission Proposes Increase of EU Funds Co-Financing for Six Countires

The European Commission has proposed to increase the co-financing rates for the EU funds for six EU countries that have been affected by the crisis.

Under the proposal, six countries would be asked to contribute less to projects that they currently co-finance with the European Union. The supplementary EU co financing is designated for Greece, Ireland, Portugal, Romania, Latvia and Hungary.

The measure does not represent new or additional funding but it allows an earlier reimbursement of funds already committed under EU cohesion policy, rural development and fisheries. The EU contribution would be increased to a maximum of 95% if requested by a Member State concerned. This should be accompanied by a prioritisation of projects focusing on growth and employment, such as retraining workers, setting up business clusters or investing in transport infrastructure. In this way level of execution can be increased, absorption augmented and extra money injected into the economy faster.

It concerns Member States that have been most affected by the crisis and have received financial support under a programme from the Balance of Payments mechanism for countries not in the Euro area (Romania, Latvia and Hungary) or from the European Financial Stabilisation Mechanism for countries in the Euro area (Greece, Ireland and Portugal). Bulgaria is not included in this scheme.

 

 

The Second Greek Bailout: the Details

The leaders of the eurozone have approved the second bailout of Greece that is supposed to finally overcome the debt crisis in this country. The total official financing will amount to an estimated 109 billion euro. The European Financial Stability Facility (EFSF) will be used, but the maturity of the loans will be extended from the current 7.5 years to a minimum of 15 years and up to 30 years with a grace period of 10 years. Lending rates will be around 3,5%, close to the costs of borrowing for the EFSF. The maturities of existing loans from the first Greek bailout will be extended. The private sector will contribute with up to 37 billion euro. Financial institutions will be offered a set of optional forms of contribution, including the buy-back of Greek debt, the extension of bond maturities and the rollover of existing debts. Greek banks will be recapitalized “if needed”.

The EFSF and the European Stability Mechanism (ESM) will be allowed to:

  • act on the basis of a precautionary programme;
  • finance recapitalisation of financial institutions through loans to governments including in non programme countries ;
  • intervene in the secondary markets on the basis of an ECB analysis recognizing the existence of exceptional financial market circumstances and risks to financial stability.

The EFSF lending rates and maturities for Greece will also be applied for Portugal and Ireland.

So will the new bailout be effective? It’s hard to say. The economic commentators are somewhat sceptical. Felix Salmon notes that this deal is not enough on its own to bring Greece into solvency. He believes that this is not a one-off event and that the same instruments will have to be used for Portugal and/or Ireland.

It’s clear that the deal will alleviate fears for a financial meltdown in the eurozone. However, the deal does not efficiently address the growth problem for Greece (and by extension for Portugal, Ireland, Spain, etc.). The fundamental problem of the eurozone persists. Until we manage macroeconomic imbalances and structural impediments to growth, we will not be able to overcome the reasons for the current debt crisis.

 

 

The Irish Bailout: the Details and the Bigger Picture

The details of the Irish bailout are now set:

EU countries and the International Monetary Fund will provide up to €85bn in total, which may be drawn down over a period of up to 7½ years. About €50bn is aimed at bolstering Ireland’s public finances while it implements a €15bn austerity package over the next four years. Of the remaining €35bn, €10bn will be used to recapitalise Ireland’s stricken banks, while another €25bn will be a contingency fund to help support the banking system if necessary. The Irish government itself will contribute €17.5bn towards the bank contingency fund, while the IMF will put €22.5bn towards the overall package. This will also include three bilateral loans from the UK, Sweden and Denmark, with the British contribution being around €3.8bn. Ireland will pay average interest of 5.8 percent on the loans.

More importantly, the Council agreed on speedy introduction of a permanent European Stability Mechanism (ESM). An ESM loan will enjoy preferred creditor status, junior only to the IMF loan. The most important feature are the so-called collective action clauses (CACs). These clauses allow a large majority of bondholders to agree a debt restructuring that is legally binding on all bondholders. CACs are meant to ease the process of debt restructuring. The CACS will be introduced in mid-2013.

The proposal for ESM is supported by the president of the ECB, Jean-Claude Trichet. The president of the European Council, Herman van Rompuy, will present proposals for amendment of the Treaties in December.

There is, however, a problem. The financial markets seem unconvinced. As Eurointelligence notes, the problem is that the market demand for peripheral debt is weak, and from 2013 demand for peripheral bonds may dry up completely due to the bail-in rules. And the 6% interest on bailout loans may be too high for Ireland to stay solvent.

There are some ideas how to handle this. Wolfgang Münchau proposes to separate national debt from financial debt and to turn all outstanding sovereign bonds, existing and new, into a common European treasury bond. He does admit that his proposal is not actually feasible, though.

So a more practical approach is to see whether, after all, the EU rescue system can survive the waves of uncertainty. Spiegel International does just that, and notes that of all the possible next bailouts, one is a no-brainer. If Spain falls, so does the euro.

 

 

Who is the New Greece?

New clouds are gathering over the eurozone.

Ireland has turned to the European Commission to seek support for its revised budget-cutting plan. Olli Rehn, the European commissioner for economic and monetary affairs, is going to Dublin to discuss the new Irish budget cuts, amounting to 3.6 percent of GDP. The move aims at convincing the bond investors that are currently reluctant to buy Irish bonds. The word “bailout” hangs in the air.

Portugal plans a 5 percent cut of public sector wages and an increase in value-added tax (VAT) by 2 percentage points to 23 percent. Greece’s austerity plan is not working as planned, as budget revenue has grown below expectations.

On top of this the US has, with its second wave of quantitative easing (QE2), practically cornered the eurozone. QE2 should bring new upward pressure on the euro, further undercutting the competitiveness of eurozone exports.

All this tell us that the eurozone is still in serious trouble. Even if governments in the periphery manage to escape the bailout scenario for now, in the medium turn their position remains quite unsecure. That is why it’s worth reading the somewhat disruptive analysis of Samuel Brittan (free FT subscription required) on the imminent death of the euro. Mr. Brittan says that the current battle to save the euro resembles the unsuccessful struggle from 1961 to 1967 to stave off sterling devaluation. A cycle of rescues and new crises ultimately ends with acceptance of the inevitable.

Now, I have discussed the possible breakup of the euro before. This is a plausible scenario, but luckily not the only scenario. A breakup of the eurozone will deal a huge blow to the integration dynamic, and should be avoided. Hopefully all Member States understand that, but it remains to be seen whether key eurozone Member States act on this understanding.

The Existential Crisis of the Euro – Where Did We Go Wrong?

The German government is on the forefront of an attempt to restrict the volatility of the euro exchange rate. First, the German financial regulator BaFin placed a unilateral ban on naked short-selling of eurozone sovereign debt instruments, with little effect. Second, Angela Merkel proposed a comprehensive reform of the stability and growth pact, with tougher rules of the game aiming to achieve one thing in particular: that member states bear the responsibility for a solid budget management. Third, Germany is hosting an international conference on financial market regulation in Berlin.

So far, so good. The markets, however, are not impressed. In fact, some analysts say that the euro may fall below parity with the dollar in the first quarter of 2011. The problem is that the decline in the euro may hurt demand for the region’s sovereign bonds in the year when new debt will be soaring.

The President of the eurogroup, Jean-Claude Juncker, says that foreign-exchange intervention isn’t an urgent issue.

One leg of the problem according to Proffessor Michel Aglietta, is that we have a solvency problem with Greece, not a liquidity problem. He says that the austerity program for Greece is a ticking bomb that could cost dearly to the whole European Union. He advocates for immediate restructuring of the Greek debt. He also says that the eurozone will not survive without a system for budgetary transfers among eurozone members. according to him the private sector is not capable to compensate for the draconian austerity measures in Portugal, Spain, Ireland and Italy.

Jan Kregel and Rob Parenteau outline the key aspects of the eurozone predicament using the financial balance approach developed by Wynne Godley. They say that the current attempt at “budgetary discipline” in peripheral eurozone members will lead to fiscal retrenchment, private income deflation, and rising private debt distress. They warn that IMF conditionality is bound to set off the twin contagion vectors of falling trade surpluses and rising bank loan losses in the core nations.

I am not an economist. But these warnings against the current EU approach towards the eurozone crisis come from too many places (for alternative ideas see Peter Bofinger and Stefan Ried, Avinash Persaud, and Paul De Grauwe). This issue is way too serious to be decided upon in a hurry.