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...and why it's not quite kicking off in Portugal

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Paul Mason | 08:33 UK time, Friday, 11 February 2011

I'm in Portugal, where the country's cost of borrowing spiked above 7% again yesterday, forcing the ECB to resume buying the government's debt. There have been strikes all week, but in marked contrast to the rest of peripheral Europe - and in defiance of Glenn Beck's global intifada predictions - it's all laid back. There was no picket line at the big commuter station yesterday, just a near total strike. You could hear the station clock ticking.

But the markets are worried for the usual reasons. Here the political debate is all about austerity, but it's between a vocal parliamentary opposition of Communists and New-Leftitsts (ie to the left of Communists) versus the Socialist government, which is backed by the right, which is labelled "Social Democrat". These names alone would have a commentator like Glenn Beck choking on his Cheerios, because the whole panoply is profoundly committed to Europe and the social model. The debate is which bit to chip away at to calm the markets. Nobody proclaims the shrinkage of the state, the rise of the Big Society, the benefits of austerity.

So what are the risks? Portugal is getting its budget deficit down - but by cutting a public sector which, since EU membership has kept the country buoyant, it risks provoking a new recession. Here, as in the UK, there is talk of rebalancing - but the biggest challenge is that they import more than they export. Industries are being devastated by the triple whammy of recession, falling public sector demand and the underlying shift of low-value production away form places like this into Asia.

There is no air of crisis but one of resignation and, despite the gaudy gentility of this utterly polite and fastidious nation, gloom. There are dole queues in every town: the faces are mostly those of migrants and the older workers. This reminds me of Britain in the 1980s - they crowd into small rooms on plastic seats to wait for their number to be called.

The big decisions about this country's future will be taken in Brussels now. WHat the markets were betting on, yesterday, is that Brussels will - as is now traditional in the choreography of EU sovereign debt woe - fail to act decisively, or agree a clear way forward.

With the CP and Left Bloc owning 20% of parliamentary seats - and 23% of the vote - and with all major parties tied into the austerity measures - there is what investors call a "non-negligible" political risk too: if the left's 23% crept up towards 30% that would place pressure on Portugal's ruling political class - many of whom were active in their own Egypt moment, the day in April 1974 when they brought down the right wing dictatorship of Salazar.

The speculator were out yesterday - but Portugal's real problem is not speculators: it's people who hold bonds for the long term benefit of savers and pensioners. They're getting out of Portugese bonds because 7% interest is not a high enough price for the risk they might not get some of their money back. Call it illogical, but that's what even big investment funds in the USA are starting to say.

See my report next week on Newsnight.

Comments

  • Comment number 1.

    The single reason why it's kicking off in places like Tunisia and Egypt, but not kicking off in Portugal, UK, even to some extent Ireland, is all to do with extent of awareness of, and impact of the Kleptocracy:

    http://golemxiv-credo.blogspot.com/2011/02/guest-post-by-hawkeye-sell-freedom-buy.html

    "far from a free culture, we are in fact in the grip of a highly controlling one; it’s just that we don’t recognise its form..... instead we are seeing the omnipresent spectre of debt, a modern Feudalism enacted through state sponsored loan sharking....they can count on our compliance in permitting them the authority to enforce repayment, no matter how harsh the terms.

    We have accepted the myth that the guilt lies with those who got in to debt, rather than those who made the foolish loans in the first place. It’s not the done thing these days to renege on one’s debt, no matter the complicity of the lender. We are being conditioned to conclude that the public deserves the austerity, as if it were a mess of their own making."

    The Kleptocracy was blatant in Egypt and Tunisia, and the average person was finding it hard to make ends meet. Hence the rebellion. The typical person in Ireland is broadly aware of the Kleptocracy, but fortunately still has a comfortable lifestyle. In the UK we have a comfortable lifestyle and very little awareness of the fraud.

    Any nation with an average income of over $12k can probably sustain revolt, even in the face of outright neo-Feudalism. "Let them have Facebook" - the Kleptocracy cries, as it helps dole out the 21st Century Soma.

  • Comment number 2.

    So how does having hundreds of thousands on unemployment and other benefits doing nothing productive paying no taxes help get their deficit down? If Portugal follow the way of Ireland and Greece their medium term debt problem and Euro financing problem become worse. Maybe the Chinese will help out, although I suspect the political parties in Portugal are too left wing for Beijing.

  • Comment number 3.

    I'll try a simplified post whilst #1 sits in the thoughtcrime pending tray.

    Perhaps revolution is a function of two factors. The people becoming aware of the overt exploitation by a tyrannical elite (think relative income difference), whilst the majority is actually very poor and can barely afford food and clothing (absolute income).

    Portugal, Ireland, the UK and the US are witnessing wide gaps in income (created by a Kleptocracy?), but they are fortunate to still retain a reasonable standard of living. But for how long?

    http://golemxiv-credo.blogspot.com/2011/02/guest-post-by-hawkeye-sell-freedom-buy.html

  • Comment number 4.

    I might be wrong but I thought the Portugese Government was doing ok but it was the Portugese Banks that were looking dodgy and if these fell then the Government would not have sufficient to save them (and so cause a Government failure)

  • Comment number 5.

    If there has been some very bad lending practices going on, who should bare the brunt of this? The borrower alone, the lender alone, or a shared responsibility?

    This is THE public debate that should be taking place, but is dodged or quashed at every opportunity.

    I saw a good lecture at the LSE by George Magnus on Wednesday. He had briefly mentioned about debt re-negotiation and destruction at the start of his talk, but then never really discussed it further. I raised this with him during the Q&A, that bank bailouts and austerity measures are not permitting debt destruction, in fact quite the opposite, protecting the lending class at the expense of the public at large.

    Mr Magnus guardedly admitted that there was some justifcation for “an Austrian prescription”, and that (with hindsight!) debt re-negotiation may have been a better solution than bailouts.

    But we need foresight, not apologetic hindsight. As I’ve asked before, are we really "all in this together"?

    http://forensicstatistician.wordpress.com/2011/02/01/are-we-all-in-this-together/

    Austerity assures that the lender bears no responsibilty whatsoever for their faulty judgement in lending out in the first place. It is not debt destruction but instead debt maintenance by any means necessary. I didn't get myself stupidly in to debt, so why should I, or students, or public sector workers pay the price of private debts gone bad? Taxation without representation.

    This situation is compounded by the evidence that the banks have potentially been mis-representing the cost of borrowing, and then when it goes wrong to shift the burden on to the tax payer.

    It is nothing less than Collective Punishment deliberately engineered in, or as Michael Hudson calls it: “a post-modern neoserfdom that threatens to return Europe to its pre-modern state.”

    http://michael-hudson.com/2011/01/the-spectre-haunting-europe/

  • Comment number 6.

    "The whole (Portuguese) panoply is profoundly committed to Europe and the social model. The debate is which bit to chip away at to calm the markets."
    The big decisions about this country's future will be taken in Brussels now, and these big decisions will include the very important, pending Financial Activities Tax (FAT), which for some reason the media is keeping very low key, which usually means that the media's vested interests do not want the people to wake up to the FAT. The vested interests seem to want the public tied to austerity & spending cuts.
    The speculators may have been out yesterday, but it's been the historical speculation e.g. the sale of American bundled derivatives, rated AAA, and really WORTHLESS that has hurt the soverign debt of so many countries. To verify this, all one need do is examine the bad debts, the write-offs, and perhaps the illegality of what has been done to European countries via nefarious American financial products.
    But The European Investment Bank (EIB) has granted a EUR 200 million loan to Banco BPI (BPI) for financing investment projects promoted by small and medium-sized enterprises (SMEs). The finance contract was signed very recently in Lisbon by EIB Vice-President Magdalena Álvarez Arza and the CEO of BPI, Fernando Ulrich.
    Improving SMEs’ access to finance is a strategic objectives of the European Investment Bank to boost economic activity and job creation.
    As the leading bank in support for the best performing SMEs in Portugal, BPI will strive (as it has historically) to obtain the most appropriate financial conditions, primarily those from the EIB, and to on lend them efficiently in support of relevant SME investments.
    The credit line is designed to support small-scale projects mainly in the areas of industry, tourism and services, including research and development, energy, & environmental protection. It may also be used for infrastructure projects. The EIB will finance up to 100% of the total project cost for SMEs (with a maximum of EUR 12.5 million per project) and up to 50% for other types of project.
    The loan will help to strengthen the productivity and competitiveness of SMEs and will foster regional development and economic and social cohesion in Portugal.

  • Comment number 7.

    Good posts Hawkeye. Regarding the "new serfdom", for some time I have held the belief that the rich, having in recent years made a smash an grab raid on the wealth of the "advanced" economies, are now looking to entrench their gains. This is why the issues raised in the Monbiot article should not go away Paul.

    http://www.guardian.co.uk/commentisfree/2011/feb/07/tax-city-heist-of-century

    Of course, kleptocracy is nothing new. Many of England's wealthiest aristocratic houses made their fortunes in the privatising asset grab which followed Henry VIII's dissolution of the monasteries.

    http://en.wikipedia.org/wiki/Dissolution_of_the_Monasteries#Consequences

    As for the new "Baltic" model of hair-shirt economics, here are Krumgman's latest assessments. Iceland has done much better - partly because of people power of course.

    http://krugman.blogs.nytimes.com/2011/02/01/comparative-peripheral-suffering/

    http://krugman.blogs.nytimes.com/2011/02/01/bloomberg-on-the-icelandic-miracle/

    http://krugman.blogs.nytimes.com/2011/02/01/pyrrhic-recoveries/

    And an historical note:

    http://en.wikipedia.org/wiki/Pyrrhic_victory

  • Comment number 8.

    Focusing purely on this week's bond interest rate hike and strikes is interesting, but it's important to look at some of the structural problems underlying Portugal's drop in credibility. This has been coming for some time. Private, not public debt is the real issue: mortgage terms of 40,50 years are not uncommon; property prices in Lisbon are at multiples of 7-15 times annual graduate salaries; and there are 200,000 unsold properties lying empty (a lot in a country of 10 million people). Wealth distribution is terrible (the worst in the EU-15), with salaries/standard-of-living for the middle three quintiles being very low. School-leaver and stay at home rates for young people are among the highest in the EU, meaning that drivers of innovation (twentysomethings, early thirtysomethings) are often at home, slacking.

    Then look at poor pre-crisis growth rates: Portugal has been wheezing along on low comparative growth for years, and did not see the noughties boom seen e.g. by its neighbour Spain. Compare this poor reported growth against 'the subsidy crutch': not just EU structural funds and recent ECB bond-buying, but also EIB funding for basic infrastructure projects. Portugal has been intelligent to have lobbied to place senior people at both the ECB and EIB (and of course the European Commission President) -- perhaps Ireland's key recent failing was Brussels diplomacy -- but the scale of the support it has received (e.g. AutoEuropa) is only just coming into the open.

    At least there is some cause for optimism: troubles in Tunisia and Egypt are likely to send more sunseekers Portugal's way.

  • Comment number 9.

    `This reminds me of Britain in the 1980s - they crowd into small rooms on plastic seats to wait for their number to be called.'

    Paul, for many people this was Britain in the Seventies, the Eighties, the Nineties and whatever the last ten years have been called.

    Britain wasn't the only country that borrowed from the future in this period. Financing economic development from debt would usually be a good thing if there was an identifiable return in productivity as a consequence of that investment, as such contributes to the virtuous and multiplying cycle of economic growth. However, I have for three decades questioned whether such productive gains have actually been achieved and if they have who has pocketed the output.

    Whereas I have seen major technological change in that period, and there has been no more significant contributor to productivity than computerisation, the well-being of the average citizen has not altered that much. Sure, some might drink a lot more, some might go on more foreign holidays, some might have bigger houses with higher paper values but there has been no major step change in personal wealth across mainstream society. If anything over that period there has been a diminution of wealth in many sectors of society. Any noticeable gain gets hoovered up through higher taxes or debt repayment. And a lot of those taxes also come from the need to repay fiscal indebtedness.

    So, the gains in wealth that seemed to have been achieved are in many ways an illusion. Governments and individuals have borrowed from the future in an expectation of jam tomorrow but our economy can only produce margarine that only arrives the day after tomorrow in insufficient amounts.

    Nearly forty-one years ago I wrote a dissertation on cultural change and its many stages of development. It was real Sixties stuff and it was very passe the last time I read it about fifteen years ago. Yet the one thing it did state is that a society which is due to face dramatic cultural change is one where illusion dominates.

    It is `kicking off' everywhere for the simple reason that the idea that something can be had for nothing went global some time ago so that either people are demanding their part of the illusion or demanding that the illusion be allowed to continue. Yet the demand is still for the illusion.

    The illusion is what is wrong. However, whether it be the bankers, the super-rich, the apparat and the debtors need the illusion to continue. But it can't and it won't.

    The current `kicking off' is all part of the illusion. The demand for real change has yet to come and when it does, dudes, it will be heavy!

    Note: I have been associating with the more `advanced' of our product managers who consider themselves quite edgy. As always I am amused by language. The real laugh is that they consider themselves very radical. They can't understand why this old codger thinks they are a bunch of conservatives. Sweet Jesus, these kids have a lot to learn!

  • Comment number 10.

    I do agree with Hawkeye about the way in which debt is used to ensnare people. (although I wouldn't call it serfdom/feudalism)

    It's the domination of the finance sector in the UK, which is one of the most well developed and internationalised capitalist markets in the world. It has to make money through charges and interest both through sucking money out of other capitals and out of people.

    The attack on living standards – Mervyn King's saying that they are at 2005 levels and will drop a lot further – is another way. People will still have to buy things and have aspirations. The only way will to borrow more so we will have another credit bubble, we are in a vicious cycle.

    I hope that the 26 March demonstration will be huge and maybe begin a heightened level of fightback. My fear is that it will be chanelled into voting in May.

  • Comment number 11.

    #9 Stanilic
    What you describe is the cultural reflection of the "decline from Empire" that was the inevitable consequence of WW2 and the growth of industrial America, Germany, Japan etc between the wars and post war reconstruction in the face of Cold War imperatives.
    The productivity gains of computerisation as indeed were the fruits of North Sea oil and gas were the eddies flowing against the tide of post-imperial decline. The City, as a world financial centre has maintained its networks and importance, so far. It has taken its pound of flesh for so doing.
    Apart from exceptional examples, the remainder of the UK economy has not produced significant widespread economic development to be able to sustain full employment without government help for the post war generations. The tide has gone out for areas of the North, Scotland and Wales (and indeed Ireland). They have little or no competitive advantage over anywhere else in the world so the net productive jobs (i.e. excluding retail, entertainment, tourism, regulatory employment etc.) have disappeared. I always tend to see the economic background to cultural change as that's the way I've been trained. Whether cultural change follows or leads is another debate altogether.

  • Comment number 12.

    #10 Little Keefer

    The attack on living standards – Mervyn King's saying that they are at 2005 levels and will drop a lot further – is another way.

    Following on from my post at 11, the above change is inevitable (in the sense that anything can be inevitable) as we have yet to successfully find productive employment for a significant section of the population.
    We have grown to c.60 million population in the UK. The wealth to be shared among the population is being squeezed by (1)tax payment, (2)sequestration by elites, (3)foreign ownership of economic assets, (4)the drive to pay off debt/deficit, and (5)the effects of inflation. Stanilic's "illusion" that we can carry on as if nothing has happened will soon enough hit home (as the end of the property bubble eventually did in 2008). Then we will see some sparks fly. Even if you were able to hold say 3 of 5 factors constant and deal with the others, one would face a pretty steep decline in national wealth among the majority of the population. To have all 5 operating at the same time is a tall order. No surprise then that we are being asked to provide library services on a voluntary basis by Dave.

  • Comment number 13.

    I'm for Greg Philo's wealth tax: http://www.guardian.co.uk/commentisfree/2010/aug/15/deficit-crisis-tax-the-rich.

    "The total personal wealth in the UK is £9,000bn, a sum that dwarfs the national debt. It is mostly concentrated at the top, so the richest 10% own £4,000bn, with an average per household of £4m. The bottom half of our society own just 9%. The wealthiest hold the bulk of their money in property or pensions, and some in financial assets and objects such antiques and paintings.

    A one-off tax of just 20% on the wealth of this group would pay the national debt and dramatically reduce the deficit, since interest payments on the debt are a large part of government spending. So that is what should be done. This tax of 20%, graduated so the very richest paid the most, would raise £800bn."

  • Comment number 14.

    I saw the item last night, I live in Portugal but like all reports it never asks a basic question as to why does it take 3 years to get a licence to sell ice cream in a seaside town which was going to employ 4 people...perhaps if such things were asked and solved Portugal might not have economic problems

 

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