On Portugal's latest political crisis, and its ramifications: Interview for Expresso

Click here for the interview in Portuguese – as published. Or read on for the original English textDo you think the 8th regular examination of the MoU by the troika staff is able to be completed in the face of disagreements within the majority supporting the current government?

Judging from past experience, mainly from Greece, the troika will not dispense a tranche while the government is in turmoil; unless all major parties, including opposition ones, sign on the dotted line. If this is not politically feasible before an election (as the opposition may wish to put on a show of defiance), the most likely outcome will be a delay until after a new government is sworn in, during which period the suspended loan tranches will be replaced, at considerable cost to the Portuguese government, by short government debt issuance that the banks will buy, post as collateral either with the ECB or through Lisbon’s own ELA, and then pass on the funds to the interim government. It is nothing more than a charade, really, the purpose of which to demonstrate the troika’s supposed toughness upon electorates that dare assert their rights to veto unsustainable programs.

Will the cuts of 4.7 billion  be implemented later this year to some degree, with the bulk of cuts included into the state budget for 2014?

It is now abundantly clear that the fresh cuts will fail to rein in the deficit, as they fuel the never ending cycle of debt-deflation. Portugal offers a case study of how the enthusiastic implementation of austerity in the midst of the debt-deflationary-banking crisis causes deficits to persevere; even to expand. For the sake of Portugal’s social economy I hope and pray that they will be deferred as much as possible; hopefully cancelled.

Will Portugal  be able to finalise the bailout program in the middle of next year? Will the government  be able to reach the end of the bail out program?

If by ‘finalise’ you mean ‘exit successfully’, the answer is negative. Portugal, like Greece, Ireland etc. has debts that cannot be serviced given the state of aggregate demand. The Eurozone has been, so far, pretending that this is not so. Next year Europe has a choice. Either to come clean, and admit that unserviceable debts cannot be serviced in a deflationary environment, or to keep ‘extending and pretending’; to find another way of securing loans for Portugal’s insolvent government. I do hope that they face up to the truth and stop pretending. But I am not holding my breath. What is most likely is that they will try to shift Portugal from ESM-IMF bailout funding to OMT indirect funding. This idea appeals to them because it will allow Europe to pretend that Portugal is back in the money markets; that it is borrowing from bond markets and not from the European taxpayer. Of course, the only way of doing this is if the ECB holds a pistol to bond dealers’ heads, via the OMT, threatening them with a wipe-out if bond yields rise above a certain level. Naturally, to do this, Europe will impose a further Memorandum of Understanding upon the Lisbon government and the troika visits (possibly sans the IMF) will continue ad infinitum. I loathe saying this but the end of Portugal’s irrational economic occupation is not nigh.

Will there be space for a solution of a technocratic government by the President of the Republic and supported by Parliament, as happened in Greece? Do you think financial markets will appreciate this “emergency government”?

It is possible. When the economic implosion leads the political scene to its very own implosion, Brussels, Berlin and Frankfurt  tend to assemble a band of ‘technocrats’ and politicians that stand in for the government that the political process can no longer provide. Of course, no one will be placated by this; not the electorates, nor the financial markets. But then again, Portugal is not part of the financial markets; at least not as a sovereign nation. Its private sector has no real access to credit markets (with the exception of some foreign owned production facilities – which might as well be producing outside of the realm of the Portuguese economy) and its public sector is funded from the ESM. Even if the government returns to the markets, it will be done under the umbrella of the ECB’s OMT – as a protectorate. In this sense, it really does not matter what the financial markets honestly think about the Portuguese government. They are quite indifferent as long as Portugal is run from Frankfurt and Berlin.

Can Portugal issue long term bonds this year as planned, or will the rise in the yields prevent these future operations in the bond market?

As mentioned above, it all depends on whether the ECB is prepared to signal to markets that it is placing Portugal under its OMT umbrella and, additionally, on whether the bond markets continue to desist from testing the OMT’s credibility. Under those circumstances, it is perfectly possible for Portugal to ‘return’ to the bond markets. Only it is will be a phoney return that makes no difference to its people’s lives.

After the completion of the bailout program, will Portugal  need a second bailout by the troika as happened with Greece early on, or is there a greater probability of a precautionary program by the ECB with conditionality?

As I said, they may opt for an extension to the OMT. It makes, unfortunately, not an iota of a difference. For as long as they impose self-defeating austerity upon a defeated social economy, Portugal’s recovery will not arrive – whatever the source of continued funding.

Is a PSI debt restructuring likely?

A haircut will happen. And not just in Portugal. The debt overhang of the Periphery is unsustainable while Europe is imposing internal devaluation to its economies. Whether it will take the form of a PSI or an OSI will depend on how long they delay it. For example, if they wait and wait and wait until all debt has passed on to the official sector, there will be no rationale to a PSI. An OSI will be the only option. If, on the other hand, they effect it earlier, first they will introduce an inadequate PSI and then, much later, the OSI will come. Either way, Portugal’s economy will have suffered a gigantic, and wholly unnecessary, cost as a result of delaying the inevitable.