Europe’s rescue euphoria threatened as Portugal enters ‘Grecian vortex’

From the Telegraph Web Site this Morning:

Monetary contraction in Portugal has intensified at an alarming pace and is mimicking the pattern seen in Greece before its economy spiralled out of control, raising concerns that the EU summit deal may soon washed over by fast-moving events.
Data released by the European Central Bank show that real M1 deposits in Portugal have fallen at an annualised rate of 21pc over the last six months, buckling violently in September.

By  Ambrose Evans-Pritchard

Data released by the European Central Bank show that real M1 deposits in Portugal have fallen at an annualised rate of 21pc over the past six months, buckling violently in September.

"Portugal appears to have entered a Grecian vortex and monetary trends have deteriorated sharply in Spain, with a decline of 8.4pc," said Simon Ward, from Henderson Global Investors. Mr Ward said the ECB must cut interest rates "immediately" and launch a full-scale blitz of quantitative easing of up to 10pc of eurozone GDP.

The M1 data – cash and current accounts – is watched by experts as a leading indicator for the economy six months to a year ahead. It has been an accurate warning signal for each stage of the crisis since 2007.

A mix of fiscal austerity and monetary tightening by the ECB earlier this year appear to have tipped the Iberian region into a downward slide. "The trends are less awful in Ireland and Italy, suggesting that both are rescuable if the ECB acts aggressively," said Mr Ward.

A shrinking money supply is dangerous for countries with a high debt stock. Portugal’s public and private debt will reach 360pc of GDP by next year, far higher than in Greece.

Premier Pedro Passos Coelho has been praised by EU leaders for sticking to austerity pledges under Portugal’s EU-IMF rescue, but the policy is pushing the country deeper into slump and playing havoc with debt dynamics.

The EU deal was not designed to deal with such a threat. The working assumption is that Greece alone is the essential problem, and that other troubles are under control or caused by jittery markets.

Officials hope that debt relief through private sector haircuts of 50pc will be enough for Greece claw its way back to viability, and that spillover effects can be contained by bank recapitalizations, raising core Tier 1 ratios to 9pc with €106bn of fresh capital.

A boost in the €440bn bail-out fund (EFSF) to €1 trillion or more – by opaque means – will supposedly create a "firewall" to rebuild market confidence and stop contagion to the rest of Club Med.

This rescue machinery may prove to be a Maginot Line if — as many economists think — the danger comes from within Portugal, Spain, and Italy. Like Greece, these countries have lost 30pc in labour competitiveness against Germany since the mid-1990s. That is the root of the EMU crisis. A toxic mix of fiscal tightening, higher debt costs, and now the threat of a eurozone recession risks tipping them over the edge.

The hairshirt summit ignored this dimension of the crisis. Italy was ordered to cut further, balancing its budget by 2013. The mantra was "rigorous surveillance" of budgets and "discipline". There will be laws to enforce "balanced budgets", and EU officials will have extra powers to vet economic policy.

This marks a step-change in the level of EU intrusion. Greece will be subject to a "monitoring capacity on the ground", implying a vice-regal EU presence calling the shots in Athens.

German Chancellor Angela Merkel said the goal is to create a "stability union", not a fiscal union. There will be no joint bond issuance, no shared budgets, no debt pooling, and fiscal transfers. The elevation of EU commissioner Olli Rehn to post of economic tsar does not change this.

Germany has dictated the agenda, vetoing calls to mobilize the ECB’s full firepower to halt the crisis. The Bundestag even ordered Mrs Merkel to insist on ECB withdrawal from existing bond purchases.

Jean-Luc Mélenchon, leader of the French leftist Front, said Europe is now marching to Germany’s drum and "headed for disaster", a view gaining ground across Europe’s Left.

Albert Edwards from Société Générale said the ECB will have to act, over a German veto if necessary. "The increasingly frenzied attempts of eurozone governments to persuade financial markets that they can draw a line under this crisis will ultimately fail."

"The impending threat of a euro break-up will force the ECB to begin printing money, very reluctantly joining the global QE party. The question is whether Germany will leave the eurozone in the face of such monetary debauchery," he said.

Whether the EFSF alone is up to the job of containing the euro crisis may depend on how it is constructed. The apparent plan for "first loss" insurance on bonds concentrates risk, endangering the AAA rating of France and other creditor states that anchor the fund. "It is too complex and potentially dangerous," said RBS.

Japanese investors who bought the first EFSF bonds this year under entirely different assumptions are facing big losses as the instrument loses market credibility. They are angry that the fund has metamorphosed into a high-risk monoline insurer. The fund will in any case cover only new issues of debt. This instantly degrades old debt. There will be abritrage between insured and insured countries. Market forces are being profoundly distorted.

China may participate in a special purpose fund to buttress the EFSF, but only as a quid pro quo for industrial and trade concessions. French Green leader Daniel Cohn-Bendit said Europe was making a "dangerous mistake" by going cap in hand to Beijing.

RBS said market euphoria is unlikely to last long. The precedent of de facto default in Greece – which the EU authorities once promised to prevent – will cause investors to "reprice" the sovereign debt of all vulnerable states. "The summit solves one problem by creating another. We expect the market to deteriorate and see the ECB as the only backstop," said the bank.

Europe’s leaders are betting that a reduction of red tape and a radical shake-up of the labour markets will unleash growth in Greece, Portugal, Italy and Spain, a decade hence. In the meantime, the governments of these near helpless countries must soldier on with perma-slump, and riot gear, and pray for a miracle.

23 thoughts on “Europe’s rescue euphoria threatened as Portugal enters ‘Grecian vortex’”

  1. The books by John Grisham are good reading to put all this financial malarkey into perspective …. there is them, there is us and there is the truth. Rich folk don’t care ….
    apart from making more money.

    Has anybody seen a poor politician lately?

    I am secretly delighted that many world leaders (sic – what!) are stranded by the industrial action affecting Quantas Airlines ….. but no doubt having to stay in 5* Hotels in leiu of travel, shame, you are paying – whilst I may not understand/agree with the reasons for the union dispute, I am wholeheartedly “chuffed” that these poor (?) and out of touch folk have at least experienced some form of a reality check regarding THEIR activities and motion making decisions … welcome to the (su)real world guys. Of course, unlike you and I, they will have full salary payment, expense and disbursment of extra costs and entitlements adding up to a bonus – how the other half live etc…..

    And THEY are making the policy … for Europe, The World and you ……

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  2. I am very disappointed with the quality of modern politicians.
    Sarkosy and Merkle are not up to it.
    The others are remarkable for their concealment.
    The Merkle /Sarkosy idea is to borrow even more money ( Trillion?) to pay off the debts of the Eurozone countries and is crazy.
    The repayments will never take place as the amount of taxes needed to be raised will be more than the electorate will condone.
    This together with the loss of many public services could tip us into conflict.
    Sarkosy has just taken delivery of a Presidential Eurobus fully fitted out at a cost of 150million.
    You can’t make it up!
    There will be 2 systems of EU as I see it.
    The Eurozone with a federal tax raising and law making government, the menbers ceeding all sovereign powers to Brussels.
    And the members of the non eurozone EU who will retain their own fiscal powers with total self government ,but trade and relate to this Super Eurozone rather as Switzerland.
    This can only be good for the outsiders as the EU is desperate for their purchases.

    As Merkle said on thursday one has to be careful we don’t end up at war together again if the finances are not settled properly

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  3. Martin

    Have you looked at Euro news. Switzerland considers euro aid role. The USA has not come to agreement how they going attack their debt yet! They may be in for a shock if they ask the world for a hand out to solve their debt. The world shouts out, “sorry the kitty bare”. They will get their heads round the problem, like they did in the 30s. If you wrote a book whats going on with the world, it would been a best seller, don´t you think. I can see it be Can see it be China, Russia, Brazil, India, and others developing countries that will come out on top. I agree with you they be a two speed euro train, as long the drivers and travelers are happy looking out their windows on the country side.

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  4. Martin using your words. I am very disappointed with the quality of modern politicians. They always been like that. You only get good ones time to time. Churchill for example. Britain has to make it mind up Euro land like other counties is like a hole in the Titanic. Do Britain moan they a hole in the ship and do nothing but moan, or get round the captains table and give input and try and save the ship and its people. I prefer input across the table then war.Everyone needs everyone at the moment. People needs across the EU land to get their heads together and put pressure on the EU Parliament saying ” we dont want fat elephants” make cuts in your waste, cut jobs where they too many unelected people, cut red tape this better for business. Most of all cuts in Parliament waste. You waste is our waste, as it could be used to create work and is much needed to turn the economy of the Euroland. Then say we need our EU “elephant to go on a diet” She be more happy in the future. Then everyone will win in short term and long term. Get back to good old fashion book keeping, with 3 quotes, people check works done, then taking word. In long term when things pic up, bring back spot checks on work or money how it spent. If you want to join anything in the EU you have to show us your accounts you can meet standards. We never going to accept any country lie in future. Then we learned our lessons from the past. EU may not be perfect, but it better then war war war. If it was not for the new developing countries, helping us, we would have something to moan about. Clocks would have not only gone back wards 1 hour, but back to the 30s. The rest we all well aware of national far right politics. When people have nothing, bread was looked on worth more then gold, when you starving. Lets do the changes from within.

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  5. Martin how did our ancestors changed the world on slavery, rights for women, gays, race, or others. It took time and only and friendly asking and putting on pressure on the top people. Its like maths if the answer is write, no amount of pressure it can the answer be different. If you learn against a wall long enough it will fall. Look at Berlin wall, China, Russia. They changed because they realised they was wrong. they is a lot of good in the EU, people can move across the EU with freedom. Little spot checks. If Britain upsets the EU too much, they have the last say. Come one lads its the Brits lets do more spot checks, strip the car down check for drugs. You stand there knowing little can be done. till they finished the job and told to go. They have a smile on their faces. Ring up next country and the next they a brit on the way, Upset their holiday they remember us in future. Or by again checking holiday bags in arrivals. They be only doing their job. Don´t throw the baby out with water the old saying go. Once people in the EU see Britain is changing the faults of the EU they more likely be a smile on their faces. They helped us they helped us to get back to work to feed the family.

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  6. Tom this may interest you. From Euro news news flash….Greece’s prime minister says he will call a referendum on the country’s new EU aid package.Watch the markets now.

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  7. I wish each Euro country had to publish detailed accounts for each of their ministries and departments, down to individual salaries.
    I would like to know down to the finest detail how much they pay for their supplies, even the price of a Euro paper clip.
    I would like to know source of funds and banking details such as account management fees.
    All the information is collected and recorded as part of any proper acoounting function.
    Instead of a few copies of these accounts, thousands can be sent out electronically, into the ether for us all to digest and respond, as we found all the tom tit they contain.
    That will cut zillions of our tax bills.

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  8. “There are more Porsche Cayennes registered in Greece than taxpayers declaring an income of 50,000 euros (£43,800) or more, according to research by Professor Herakles Polemarchakis, former head of the Greek prime minister’s economic department. Something can’t be right when the modest city of Larisa, capital of the agricultural region of Thessaly with 250,000 inhabitants, has more Porsches per head of the population than New York or London. ”

    The UK pays around £64,000,000 PER DAY for the privilege of membership to this scam. This is so we can be told by Sarkozy to mind our own business and stop interfering in the eurozone (but by the way – keep on paying!)

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  9. Italian government buys 19 Maserati supercars despite austerity cuts
    Italy may be in the midst of a savage austerity drive but that has not stopped defence ministry officials ordering a fleet of armoured Maseratis to ferry themselves around Rome.
    Ignazio La Russa, the defence minister, dismissed the row “What’s the problem?” he said.

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  10. Yes Peter. A wonderful day indeed – unbelieveable weather for 1 November. Santa Cruz was very quiet today and Sa was even quieter still with discounts on many items. Are people starting to really struggle now with austerity measures?

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  11. Debs It could be the bank holiday, why its quite. Please you had a nice time makes a change to doom and gloom on tv now days. The world will go round again for another day. I like Santa Cruz cool place to chill out.

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  12. The Greeks are showing their real regard for the Germans.
    Perhaps if all the stolen billions repatriated to the Third Reich during the last conflict were returned to Greece with interest they might toe the Merkle line.
    Doubt they will.

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  13. Martin Yes Doubt they will. Think both camps in Euroland Yes/No right. Its up to the leaders to go back to basics why they join the EU and sign new papers and agreements. To throw the baby out the water is not a good idea. In long term lessons need to be learned. By all Countries by being honest and better book keeping. They lots of mistakes been done in the past. Churchill said once jaw jaw jaw, is better then war war war. I see new Europe in long term, hopefully much better Europe. That future will be made by its leaders. All I can say to the leaders “any one for aspin”. 🙂

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  14. One thing is certain. the political leaders of the eurozone are having to work for a change.
    Let us hope the gravy train stops dead.
    Can anybody think of a politician (apart from Cameron) who has taken a pay freeze/pay cut whilst the turmoil continues?
    There must be some somewhere-don’t you think?

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  15. Martin I think it would look bad if leaders took pay rise. I do think they been leaders not taking pension rise. I think if was possible to look at records pay freeze as well been done by leaders. What wrong with politics we have people getting involved in politics with no or little in the way of qualifications in top (ranking jobs). The world has changed to much more aggressive politics. You need to be fast and change quickly to demanding world, that required. This has shown up many Leaders, MPs, MEPS as well. Change is needed by all politics.

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  16. Sarkosy and Merkle demand Papandreus of Greece come to a meeting to explain himaself to them.
    How dare he ask his electorate in a democratic way via referenda, if they wish to be impoverished by massive debt for the rest of their lives.
    How dare he aske his electorate.
    This is NOT the EU way.
    The two self promoted ‘leaders’ of the Eurozone are acting in their typical Soviet style way.
    Where is democracy in the EU?
    Why borrow billions to pay off debt?
    A private person went to their bank and announced he/she has spent twice their annual income.
    Could they borrow lots more, maybe three times their annual income and pay it back within a century or so.
    I know the answer.
    Good on you Greece!
    But please reorganise your civil service.
    We can’t stand the strain!
    How come the EU leaders do not?

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  17. I bet when we come back to Madeira—before Xmas–I hope–that the weather becomes terrible for our drive across Spain and Portugal to Portimao.
    I’m not sure the heater works in the old girl we propose bringing.
    At least the Naviera Armas website is now re organised to be better understood but still user unfriendly.
    Prices remain steep.

    Reply

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