Greece Saved For Now – Is Portugal Next?

By Peter Boone and Simon Johnson

The Europeans announced Sunday they would provide 30 billion euros of assistance to Greece, amid informed rumors that the IMF will offer another 10-15 billion.  With a total of say 40-45 billion euros in the bag – more than the market was expecting — the Greeks have time to make changes. 

The Greek government, helped by the market threat of a near term collapse, appear to have strong armed the other eurozone countries into a generous package without making efforts to change seriously their (Greek) fiscal policy.  This is good for near term calm, but it does not solve any of the inherent problems now manifest in the eurozone.

Often assistance packages of this nature just help “smart money” to get out ahead of a default.  This could be the case here; 40-45 billion euros total money could last roughly one year.  Both Russia and Argentina got large packages in the late 1990s but never regained access to private markets, so eventually everything fell apart.

Sunday’s package should make it possible for Greece to borrow short-term but it takes courage to lend for 5 or 10 years to the Greeks unless there is much more fundamental change.

There are two key things to watch for:

1)  Is the global recovery so strong that Greek’s economy picks up fast and their budget deficit comes down sharply?

2)  Will the IMF and Greeks now come up with a real austerity program that sharply cuts the deficit so that a year from now, when the official bailout money could run out, the market is receptive to Greek debt?

The danger for private debt holders is clear:  Sovereign loans invariably treated better in a restructuring than private debt.  So the European aid in some sense squeezes private debt holders.  They will be pleased there is no near term default, but it means their recovery value has gone down if things get bad again.  Greek long term yields will probably stay high.  The key market reaction to watch over the next 6-12 months is long term yields, and whether these come down to levels that imply low risk of default.

And there is still definite risk of contagion.  The actions of the EU show they are willing to intervene when yields get up to 7-8% on long term debt and markets close off to a nation. 

What does this really mean for Portugal or Ireland?  People holding Greek debt lost a lot of money in the last few months.  That will not come back soon, as markets will for a long time be wary of buying their debt – especially when Fitch just took the Greek rating to BBB minus, i.e., at the floor where the ECB now lets banks borrow against (“repo”) government debt.  

The Portuguese therefore are not at all out of the woods.  If they do not start making serious moves towards cutting their deficit, they are next for a test. 

Surely the eurozone will bail Portugal out also – but where would it stop after that?  The stronger Europeans, by coming to Greece’s rescue at this time with little conditionality, are effectively showing all the weaker nations that they too can get a package.  This will undoubtedly reduce the resolve for needed fiscal reforms across the European periphery. 

We are still lurching from crisis to crisis in Europe.

58 thoughts on “Greece Saved For Now – Is Portugal Next?

  1. Alt. A. If Europe helps out Greece, in fact by refinancing all the Euros already financed to Greece, in fact postponing having to account for the losses today, in fact meaning that Greece will not pay a Euro on those debts for as long as needed, then the Euro will be seen as weak and lira like and the Euro will go down.

    Alt. B. If Europe does not help Greece, and in fact has to absorb as losses all the Euros already financed to Greece, in fact meaning that Greece will not pay a Euro on those debts ever, then the Euro will be seen as strong and deutsche mark like, and the Euro will go up.

    Exactly the same results for Greece… and totally different short term outcomes for the Euro.

    Though Europeans would in fact favor a weaker Euro, there is not enough political commitment among the “strongest” to shoulder the burden of those considered the “weakest”.

    Does the €30-40 billion mean they are going for A or B? My gut reaction tells me that the markets even as Simon says it might have exceeded expectations are still going to interpret it as too little and therefore a political way of talking about A… while going to B.

  2. Here is Michael Hudson on European economic suicide (aka, TBTF bailout). It will:

    – shorten life span
    – worsen public health
    – worse education
    – lower productivity

  3. Tippy, nice video report. I don’t know how the problem could be stated more clearly.

  4. Simon, I know it bugs you that the eurozone got its act together and that Greece hasn’t been forced to pull out of the Euro but the “… for now” is redundant. All actions taken and all current states are temporary and pretty well anything could happen at some point in the future. You could just have easily have written:
    “US not in biggest depression ever … for now”
    “Simon Johnson alive … for now”

    A more honest assessment of the eurozone action would have been “Greece saved by eurozone and IMF”.

    It sounds like you are gunning for Portugal and Ireland now that you have lost over Greece. Not every situation that we do not want to be in is a crisis. We are addressing problem after problem in Europe and it being done calmly and rationally (in stark contrast to much of your eurozone related commentary).

  5. Gary,

    Over the next three years the Greeks need ca. 150 bln Euro of external financing. Should private capital prove reluctant to provide this financing then the 40-45 bln of EU/IMF assistance will prove insufficient.

    The Greeks by not implementing reforms (cut spending, increase tax revenues, structural reforms) are making default in 2011/2012 very probable.

  6. At times S. Johnson shows his Atlanticist bias. The problems with the Euro are large, but they can be resolved and it will most likely mean closer political and fiscal integration. That was the whole point about the EU anyway.

    The IMF’s role in the world will continue shrink; East Asia led the way and over time – as the EU matures – it will follow. Latin America wants nothing to do with the IMF.

    In a decade, the IMF’s fiefdom will be constrained to pockets of Africa and South Asia.

  7. It’s still provisional – just a promise to lend a (finally!) defined amount at a given rate IF Greece can’t get the money elsewhere. It’s designed to lower spreads so they can afford to borrow in the market. Personally I don’t think there will be a default – certainly not a chaotic one and not for a couple of years in any case.

  8. “The problems with the Euro are large, but they can be resolved and it will most likely mean closer political and fiscal integration. That was the whole point about the EU anyway.”

    No it wasn’t, not that type of integration anyway, read the treaties. You cannot lie, spend and then beg for a bailout after bailout. Germans are Germans, Greeks are Greeks and the Italians are Italians, they don’t clamor to pay other people’s debt–especially when those ‘others’ are seen as cheaters and freeloaders. What will happen when Greece with a 150% debt to GDP ratio (after 30 years of free EU money!) says sorry, we can’t pay you Eurozone suckers? What miracle that didn’t happen for 30 years is going to enable Greece to pay back it’s ever increasing debt? If they default tomorrow it will be better for others, Greece will owe them less.

    P.S. Tourism is predicted to be at least 10% lower than last years, and tourism is 20% of their GDP.

  9. Regarding the EU – Greece relationship, the EU appears poised to once more assume a coy, conflicted, passive-aggressive position for the new week.

    To express to the global financial press a new fervor and conviction for their intimate association, a cocked Luger is left conspicuously on the conjugal EU bed stand, presumed loaded with discount German loans for the Greeks, who have been entirely lucid in their fervent refusal to limit or diminish in any way their lifestyle and consumption. Along with the gun is a note from Angela Merkel, written in crimson: ‘really don’t pull the trigger, the show is to scare them off’… Greek readers, however, see only WWII reparations long disputed and sought…

    One is tempted to warn of need for EU dispatch in dealing with Greece – as Portugal, Spain, Ireland, Bulgaria, Hungary, Latvia, and Lithuania are likely soon to knock at the handout queue gate… It will be a long year.

  10. Presumably Greece will look to repay the IMF/EU loan in 3 years time with the proceeds of bond sales (as it is unlikely they will be in bidget surplus by then)

    If they then default where does the IMF rank alongside ordinary bondholders ? Pari pasu ?

    It strikes me as almost a given that they will need to restructure the IMF loan in 3 years

  11. Nice post, can you please provide some examples of cases where public lending was preferably treated over private in case of default or restructuring?
    Many thanks

  12. Wrong. The greek word for “subsidy” and “grant” are the same. Loan = “daneio” in greek, and subsidy, grant are “epidotisis”

  13. Why is Portugal next? I fail to see the connection. Portugal had their accounts in order before the crisis, to what extent is their problem similar? It seems the authors just assume they have structural FISCAL problems, when it’s not clear at all that they do.

  14. Yes, nice summary about the plutocracy gouging the rest of the population. But in the main countries, and chief of all France, outright rebellion may well happen, showing the spirit of drastic change to the rest of the aggrieved people of Europe. Thus private banks have no blank check, and the right in France knows this very well. Thiss is why the French government insisted for a Greek rescue.

    One should not forget that the countries of the European Union behave increasingly as if each of them was a variant of France. Including the UK.


  15. 1) Not so much about “Germany” (*sigh*) than about French banks.
    2) “Austerity” packages in Greece do not have to be that painful. Just make sure millionaires pay taxes, 500 professions do not retire at 50, reduce the military budget…

  16. The Greek people understand the bailout (from whichever source) as a reaction to their demonstrations against the austerity changes being planned. Given a bailout, they will be significantly unwilling to go through with the austerity program – they won and creditors “lost” and to the winners go the spoils. That said, they understand well enough that some show of change will be convenient for the overall good of the country, but I would be very, very surprised if much adjustment were to be made on the spending side of the budget. The revenue side might see more successful changes, but their are decades, if not centuries, of highly ineffective tax collection experience in Greece. A Greek success should logically motivate activists in other countries to resist efforts to re-balance budgets by reducing social expenses. Spain is not as egregious in its civil service featherbedding (at a national level, but at the level of the autonoumous regions it is a lot worse in several regions) and their tax collection efforts are better (if not at the level of Holland, for example) but the country is so much bigger than Greece it could be a huge problem. And if the Italians start thinking that Spain got a beneficial financing deal, then it will really snowball badly.

  17. Point 2): agreed, but the measure of pain is relative and every single point on this list seriously messes with powerful interests in Greece.

  18. It is in my opinion important to emphazise that (1) Athens has not asked formal for a bailout fund, (2) behind the from EU offered financial support (for non-concessional rate, i.e. 5% for 3 Years) all Euro-Zone countries are standing, thus countries called « financial weak » such as Ireland, Portugal and Spain, as FT Alphaville lists, and (3) Chancellor Merkel failed with her strict requirements for loan conditions.

    What is to expect next? Since many speculative market participants have huge short positions in Greek government securities, it will come in the next days to a strong rally at the short end of the yield curve. This means short coverings. Then? What happens then? That remains to be uncertain.

  19. “Chancellor Merkel failed with her strict requirements for loan conditions.”

    IMF might require them, no one really knows. Just looked at the FT link: Germany, France and Italy must provide some 17 Billion EUR when they know it will just vaporize!

    The worst scenario for Greece would be for the rates to stay near 6%, do they take the cheaper IMF /EU money and conditions or (make believe they will) pay more to bondholders but with less strings attached?

    But then, maybe this would be better by forcing them to deal with the reality faster.

  20. IMF will collect their Argentina exposure, something that unfortunately cannot be said about thousands of pensioners in Italy, Spain and Portugal.

  21. Your comment is interesting: there is a theory
    ongoing in Europe that Germany purposely ‘delayed’ the
    bail-out, in order to devalue ‘de facto’ the euro, and make its exports more competitive.
    Now there is also another problem: a group of German
    economists led by Joachim Starbatty ( who was given
    an “Euro-trashed”op-ed in the NYT ) was already threatening on the eve of the March European Summit, to bring the matter in front of the German Consitutional Court and request Germany exiting the UE
    for having ‘broken the rules’ and ‘helped out’ a fellow member state..As the German say, Tolle Sachen..

  22. See “Why Greece will default” by FT’s Wolfgang Münchau:
    “I am willing to risk two predictions. The first is that Greece will not default this year. The second is that Greece will default. The Greek government has demonstrated that it can still borrow at a rate of about 6 per cent but if you do the maths on the public debt dynamics, as I did recently, it would be hard to arrive at any other scenario than an eventual default.”
    Sounds familiar, no ??

  23. A view from Europe: I don’t really understand your comparison between France and the U.K, save for fiscal profligacy and the mountains of debt thus created. The problem is that the French President thinks his country is not accountable for its deficit ( 7,8% at the latest count ) within the rules of the Maastrich and Lissbon treaties- he can get away with it within the Eurozone, such an outlaw’s thinking has been with him since 2007 and they well remember him in Brussels, for better or for worse, for gatecrashing into an Ecofin meeting… The U.K has no intention of entering the Eurozone and has its own ‘printing press’ or ‘helicopter’, sovereign rating to be revised by ratings agencies after ‘outcome’ of elections, Anglo-saxon privilege..

    I would recommend you reading the following analysis
    by the French economist Jean-Claude Werrebrouck:

    ‘Eurozone: some were more than clandestine passengers’

  24. “Just make sure millionaires pay taxes, 500 professions do not retire at 50, reduce the military”

    Sure, but will EU fund the 200,000 troops that might be needed to maintain peace :) ? You cannot go from 0-100 miles /hr in Greece.

    Income Tax increases
    Income tax will be actually collected now
    VAT increase
    Lower pay
    Lower pensions
    Much lower government spending

    ‘For what’ will people think? So they can pay interest only? It will not happen.

  25. At this point, it seems Spain and Portugal are BOTH doomed. If Greece doesn’t stop its spendthrift ways, their loan is but delaying the inevitable. Even a recovery will not improve Greece’s lot. They hid their deficit in good times, a recovery will do no good. Soros is shorting the euro. Its going to be a long bumpy ride to the bottom.

  26. Not so sure… if they play it rough with Greece Spain and Portugal the Euro, instead of going the lira way, would be heading towards the Deutschemark and so, as it gathers force to become more of a reserve currency, it could strengthen.

  27. I would think that the idea of actually paying back foreign loans instead of their perpetual net rolling over would be politically impossible. Push comes to shove and Greece hurting outside the highly paid civil service sector would politically require a form of debt repudiation. Right off, great political capital could be made that stiffing the German’s is a terrific way to unilaterally settle the reparations issue. Certainly, the hurting civil servants would just love to fall in line on repudiation.Leaving the EU would be very tempting after milking it for the last added benefit. At some point the populace will desire to slake their anger on someone.

  28. This is a bottomless pit. When a company contemplates investment in a certain sector, and be it the bailout and take-over of a competitor, it first and foremost conducts a due diligence audit. Only when it is rather sure how the investment will pan out even five years down the road will it part with a pre-defined sum of money well within its means. With Greece no one yet knows what their correct figures are. PLUS no one knows if there are not more corpses in the closet, Portugal being only one of them, Ireleland and the UK are equal “competitors” just as Spain is. So what is the rationale of spending money on tiny Greece completely out of proportion if in all probabilty all states concerned pooled together could not stop the rot? What is won if the less ailing states catch the same disease so that in the end no one is left standing?

  29. That was so good, I can’t help but wonder if “Nemo” and “SomeoneGreek” are not one and the same. Anyway, thanks for the mirth in my morning.

  30. Pimco’s El-Erian: Greece aid tackles liquidity, not solvency

    Mon Apr 12, 2010 11:26am EDT

    NEW YORK, April 12 (Reuters) – “Euro zone member states’ commitment to provide up to $40 billion in loans to Greece addresses liquidity support rather than solvency issues for the indebted country, the chief executive of Pimco told Reuters.

    Mohamed El-Erian, chief executive and co-chief investment officer of Pacific Investment Management Co., said on Monday that Sunday’s agreement of a euro zone loan package tackles a liquidity crisis, not a fundamental crisis.

    “Yet markets have signaled that Greece faces both refinancing, or liquidity challenges, as well as stock of debt, or solvency challenges,” El-Erian said. ”

  31. I think the main reason for the deny and delay response is that the notion of sovereign default is very frightening to creditors right now. So, they would prop up Iceland, with debt of over $200,000 per person, as if default were avoidable. We may actually see more defaults if financial institutions gain greater strength and confidence, sort of like unemployment can grow as the labor market strengthens, because formerly discouraged workers are encouraged to search for jobs.

  32. Deflation the only option for Greece: IMF chief

    Mon Apr 12, 2010 EDT – excerpts

    VIENNA (Reuters) – “Deflation is the only way Greece can effectively tackle its debt problems, International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn was quoted on Monday as saying.

    “The only effective remedy that remains is deflation,” Strauss-Kahn told Austrian magazine profil in an interview. “And this is exactly what the European Commission has correctly recommended.

    “The way out of debt in most countries is led by a reform of the pension or health care system,” he said, adding that raising the retirement age could be one way of cutting expenditure.”

  33. “Someone told me long ago, there’s a calm before the storm.
    I know, and it’s been comin’ for some time.
    When it’s over, so they say, it’ll rain a sunny day.
    I know, shinin’ down like water.”

    – John C. Fogerty

  34. IMF Official Welcomes Financial Support Package For Greece

    APRIL 11, 2010, 5:14 P.M. ET – excerpts

    WASHINGTON (Dow Jones)–“A top official at the International Monetary Fund on Sunday welcomed a multi-billion financial rescue package drawn up by euro-zone finance ministers that Greece may tap if it ultimately needs a bailout to repay its debt.

    Dominique Strauss-Kahn, the managing director at the IMF, said in a statement late Sunday that an agreement by Euro-zone finance ministers laying out the terms of the potential financial aid package “marks a very important step.”

    “The IMF stands ready to join the effort, including through a multi-year stand-by arrangement, to the extent needed and requested by the Greek authorities,” Strauss-Kahn said. He added that the IMF will be holding discussions with Greek, European Central Bank and European Commission authorities in Brussels on April 12 to discuss the matter further.

    The euro-zone finance ministers did not, however, agree this weekend to actually extend the loans to Greece. To give Greece aid would require the unanimous agreement of the euro-zone leaders. But nevertheless, the deal aims to show that EU members stand behind their past statements of support for Greece.

    The Greek government welcomed the proposed bailout, but stressed that it hasn’t asked for aid and hopes not to have to use it.”

  35. LOVE that guy!

    Forgive my ignorance, but isn’t this bailout just as bad, and unecessary, as the bank bailouts in the US?

    Good grief, you say with your hair on fire, but we can’t let Greece (or the US megabanks) FAIL! Why not?

    So, the Greek debt defaults, and the banks (who acted irresponsibly in offering the debt to begin with) don’t get paid. At least we’re dealing with reality – not some debt sugar junkie’s continuing addiction problem.

    Anyone who invested individual people’s money (via 401Ks, pensions, etc…) in Greek debt, any derivatives, or US mortgage-backed anything should be summarily terminated. Individuals are not institutions, even if you bundle them up and hire ‘professionals’ to manage them.

    I’d rather lose my money in the market, than be gauged by the taxman to pay for large megabank superstars’ bonuses.

    Let Greece go to rehab and detox properly, no?

  36. Simon and Peter, this is truly the nature of human nature. Confronted with difficult choices (as we have seen in this country over the past year and a half) politicians are loath to take steps that are either (a) unpopular with voters and even less so if they are (b) unpopular with their moneyed allies. As in the US (a leading example of oligarchic control), the presumption is now that if there is greater perceived peril by their potential benefactors, they can and will continue to rely on being propped up. Just look at Wall Street, perhaps one of history’s most glowing examples!! The perception being marketed by their plutocratic allies, is that we can’t let them fail, and that hard solutions will cause too great economic disruption. We are told that gentle solutions are best because of the continued perilous nature of our recovery. Do we see echoes all over Europe of exactly the same situation.

    I believe that true unresolvable chaos is the only thing which will cause action in the cases of Greece, Ireland and Portugal. I hope that those (vastly in the minority in Congress) to whom we trust our future economic welfare, will soon get the idea and break up the largest banks into digestible bite-sized pieces which are not large enough to require saving if they fall off the cliff. What a great lesson we are seeing in action. Can we actually take advantage of it in the era where not a single American would be in favor of the slightest move to bail anyone out at this point.

  37. Bravo Bayard!

    I, too, believe in a ‘New Chaos Theory’ in modern finance.

    Namely that, no real fundamental solutions will be sought, supported, and implemented until the sheet hits the fan.

    Unfortunately the inertia of the status quo is too strong.

  38. Lucy Honeychurch, I discovered Michael Hudson two days ago and he seems like an amazing guy.

    Yes! Why should taxes be diverted from public goods to make whole — bad loans — brokered by bankers who earned millions and billions brokering these same bad loans? Just ridiculous.

    I am not big on right-wing tax revolts. But the tax revolt Michael Hudson is recommending is of an entirely different sort.

  39. Lucy Honeychurch wrote:

    “Unfortunately the inertia of the status quo is too strong.”

    Sisyphus would agree.

  40. “With a total of say 40-45 billion euros in the bag – more than the market was expecting”

    Yes but only until they realize that the interest rate was also higher than what Greece can handle… 5% in Euros?

  41. The Euro will break up in reverse, with Germany exiting to a new DM and Bundesbank, and perhaps inviting other strong currency nations to join. They retain much of the efficiency benefits by going to two currencies from sixteen as with one.
    Maybe a fatal flaw in the original single currency idea, since there was obviously more variation in economies than the Maastricht criteria allowed. Europe needed, and still needs, a dual currency. Medis for the PIIGS, and Baltis for the Germans. New entrants could be sorted into one or the other based on their likelihood of needing a competitive devaluation in the next five years or so. I suppose countries that prove themselves over a long period or through a crisis might even graduate to the stronger currency. And profligate nations could be relegated.

  42. The idea doesn’t account the measures that Portugal have implemented in order to Stop the arising of the debt.

    First, the Portuguese Government frozed all civil servent wages and promotions.

    Second, the arising of the public debt from 3.2 to 9.4 was due to excpetional social measures with a limited time of validaty.

    Third, one of the major contributor to Portuguese Debt was the arising, until 2005, of the current expense. The Portuguese authorites changed the law that allows contracting civil servent that already decreased in more than 50.000 people.

    Four, one of the major problems in Spain is the problem related to the civil contractors and the prices of the Houses that decreased considereably and interrelated peoblem with the finantial sector. In Portugal the economy has stagnated but there is no deflaction.

    Five, the portuguese authorites had recently decreased the Portuguese Debt from 6,4 to 2,3 in three years (from 2005 to 2008) so the credability of the country and there public accounts are intact.

    Six, the Portuguese economy is fragile but it’s suported mainly by Turism and certain Cluster that are intact such as the automobile industry.

    Seven, in the past three years Portugal had been monitoring by African Countries with a strong development has a top investment country. So, the oportunities are arising has long has the money from Angola is entering the economy.

    Eight, the country has a stable social structure imune to strikes and political changes.

    Nine, the Portuguese authorities recently informed the IMF that the debt in the end of 2010 will be probably less that 8.3, problably 7.9.

    So the Portuguese situation is totally diferent of the Spanish and the Greece situation.

  43. Wrong!
    1º The Portuguese has the lowest wages of the Western Europe

    2º The Portuguese have the highest taxes of the Western Europe.

    3º They diminish the public officers but they increase the number of Public Institutes created with public money to put people of the party of the power.

    4º All the great investments in unnecessary workmanships only had been postponed, and already they were in the reality been slow in the execution.

    5º Portugal is governed by corrupt of name Jose Sócrates, with innumerable shady zones in its past, and isn’t behind bars because of the political control of the justice system, the same way of the third world countries.

  44. Mr. Simon Johnson
    Today this article had been quoted by many newspaper, radios and televisions in Portugal.
    Our “distinct” minister of the treasury Teixeira dos Santos said that the article that you wrote “is nonsense, revealing of ignorance and in a free world of expression nonsense’s without base can be written”.
    If you understand Portuguese you can read this in
    Can you comment this?

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