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Germany pushes Portugal nearer to the brink?

Robert Peston | 17:43 UK time, Tuesday, 29 March 2011

The decision of Standard & Poor's to downgrade Portugal's sovereign debt to just a fraction above a junk rating will inevitably make it harder for Portugal to borrow in the coming weeks - when it will need to refinance more than €8bn of bonds that come up for repayment.

So in that sense, S&P's downgrade pushes Portugal nearer to crisis and the moment when it asks its eurozone partner countries for a bailout.

What is embarrassing for those partner countries is the main reason cited by S&P for the bailout - namely that eurozone leaders agreed last Friday that the new eurozone bailout fund to be launched in 2013, the European Stability Mechanism, will only lend on terms that will make it the senior creditor when it comes to repayment.

European Stability Mechanism loans will rank ahead of borrowings by eurozone sovereign states. So, by definition, the credit quality of any debt issued by a fragile eurozone country like Portugal - one deemed likely to tap the European Stability Mechanism - has deteriorated.

Which is why S&P felt it had no option but to downgrade Portuguese debt (and Greek debt too - and Ireland's debt will probably be downgraded later this week).

Or to put it another way, the understandable determination of Germany in particular to minimise losses when rescue funds are actually provided, and also to punish reckless sovereign borrowers, has had the effect of making it more likely that Portugal will have to tap the eurozone and the IMF for emergency funds (as Ireland and Greece have already done).

In other words, the reward of German prudence is that German taxpayers are now even more likely to have to bail out their Portuguese neighbours.


  • Comment number 1.

    Ah yes, but how prudent were the German banking system in lending to the periphery?
    It will be German taxpayers bailing out German banks.

  • Comment number 2.

    To paraphrase the unlamented John Major "It's a cold, cold world outside of the European Stability Mechanism" as these PIIGS are finding out.

    What is more interesting to this blogger is that under the skin of the EU is the economic motor of what we might call the Fourth Reich.

    Germany has worked hard over the past decades and now stands to reap any rewards, economic and political.

    Although as Robert Peston points out, they seem to be rather scant just now.

    Mutti must be a bit baffled by these events.

  • Comment number 3.

    The underlying problem is that Portugal's economy is not growing and further austerity as proposed recently will exacerbate the ability of the country to close the deficit significantly. This is what leads to the pressure for a bailout. They should go for a re-schedule of their refinancing programme and the EU support the measures to improve the economy through a Marshall Plan style programme. As a negotiating position they could just sit on their hands and default which will become an EU problem anyway.

  • Comment number 4.

    The supportive actions are entirely political, obviously. But Portugal can never generate enough surplus to pay off debt. If money is handed out, it becomes lost money. But if money is handed out, Moral Hazard applies.
    Ergo, devaluation is necessary. Money is still lost but there is a chance that Portugal can get back on its feet.
    This applies to all the PIGS. Italy is a morass of corruption, but at least has some excellent manufacturing (which is more than can be said of the UK, by the way). Spain might just get by, but Greece is like Portugal.
    It follows that there should be a Nord-Sud divide. A Sud-Euro at a lower value than the Nord-Euro. This has problems of money moving North at first, but that money would be available to spend in the South. Some Northern creditors would lose, but only by the degree of devaluation, at most 20%.

  • Comment number 5.

    That'll be the same Standard and Poors that gave the worst kind of mortgages a AAA rating will it? In other words, they decided that lending money to people with no discernible income was as safe as General Electric and Microsoft.

    And we're supposed to trust the word of these people?

  • Comment number 6.

    Stability was one of the key advantages of Euro membership. That was what the periphery countries wanted, and that is what they will get...

    But the LEVEL at which they will eventually stabilize remains to be seen.

    Be careful what you wish for...

  • Comment number 7.

    The debtor nations are seemingly in a weak postion with regard to Germany, who makes it well-known how fed up it is with the Piigs.
    The Piigs ate all their carrots and now need more carrots. The Germans grew their own carrots and didn't stuff their faces and make themselves sick with them like the Piigs did.
    And so understandably the German don't want to give their carrots out to the needy Piigs.
    To protect their carrots , the Germans have sticks, and they do want to use them. The Piigs don't fancy being walloped by German sticks , but the Piigs don't seem to have any sticks of their own ............. or do they?
    Perhaps a Judo like approach is needed by the Piigs.
    Germany is strong just now because its manufacturing is strong.
    The Piigs are much weaker at this.
    The one thing Piigs have that the mighty Germans need is continued and unfettered access to Piigs consumers.
    Maastricht killed manufacturing in Greece and Portugal and Spain.
    There is a need to re-appraise this as it may well be the only bargaining tool the Piigs have that matters to Germany.
    And apart from super factories, what do Germans have that Piigs don't?
    Access to cheap money!
    The German ability to raise money in the money markets at rates below those of the Piigs whilst co-existing in Euroland is in effect a subsidy of Germany and has allowed Germany,who was no saint until recently in terms of its ratio of public sector debt in relation to GDP ,to fund its way out of the crunch with relative impunity.
    If there was a ban on Euroland nations like Germany accessing money at a different rate from other Euroland Nations , it might level the playing field.
    A uniform Euroland rate would be cheaper for Piigs, but dearer for Germany.
    If this does not happen ,given that increased export success by the Piigs is needed to help them recover, might the Maastricht Treaty itself need to be broken in order to allow the Piigs the chance to rebuild their industries?
    The Piigs do not need to do this, but they need to make it clear they can!
    Stick it to 'em!

  • Comment number 8.

    Mr Peston I want to share a recent experience of a holiday visit to Lisbon. I needed a doctor, a GP, late at night. One was summoned and examined me and prescribed antibiotics. His fee was €70.00 for which he wanted payment in cash and no he would not provide a receipt. This was seen as normal. Normal also for the lawyers handling the purchase of the flat I was staying in and the architects designing some modifications. Apparently normal for the dentist also. My prescription was written using the Portuguese national insurance number of my host 'to save me money'. In short, tax evasion and corruption is widespread, tolerated and culturally embedded. Particularly for the middle class. The following morning I spotted the GP from the night before escorting his girlfriend to the door of his new BMW M3. Thus does the evasion lead to widespread distortions and deficits on the current account or in plain English the importing of luxury goods and a worsening of the deficits on government income and expenditure and the balance of payments. This is a country without a managed tax collection system nor with the inclination to implement one. I was told that my expectations were 'northern European' and should not be expected to be met in Portugal. Should we be bailing out? Really?

  • Comment number 9.

    We blame our current budget deficit ills on banks and the global financial crisis of 2008.

    But the countries least able to survive the crisis have typically been those with the lowest liquid savings rates and the highest levels of debt. Which is why Spain and Portugal have been very vulnerable.

    Things always look their worst in the middle of a crisis and given time, external support and stable government Portugal will get out of this. Bt it will involve an extremely painful period during which the people there will realise that many of the features of modern society they took for granted are beyond their means in the short term.

  • Comment number 10.

    As a possible solution - should all these broke countries with nothing to sell be forced to sell land? If any loans were secured by land then the lender could simply confiscate land to the value of the loan.

  • Comment number 11.

    S&P's downgrade of Portugal is just market forces at work. If Portugal is likely to default then rightly so it should be downgraded to reflect this risk. Of course Portugal is pushed nearer to that which we all wish not to see, however, if you leap out of an aircraft without a parachute, then no amount of arm flapping is going to help. Just ensure you do the best to get a good bounce.

  • Comment number 12.

    All this user's posts have been removed.Why?

  • Comment number 13.

    Surely the people who would be buying the bonds can work all this out for themselves without needing a ratings agency!

  • Comment number 14.

    I agree with MarkofSOSH. Why is no-one suing Standar and Poors, Fitch and the other ratings agencies over the ridiculously badly rated sub-prime housing loans, not to mention the obviously top-heavy insurance sector - AIG.

    In fact why do these ratings agencies exist at all? (Robert, let's have a treatise from you on this) - Surely contries and fund managers investing large sums of money into soveriegn bond issues have enough resources to independentently value these assets on their own. The reason they exist is that by outsourcing this function they have an independent entity setting a market price, (which in theory is a good thing) however this very act also removes responsibility from the hands of those making the investments (so they can say "not me guv" when it all goes wrong).

    I say to investors and governments, make your own mind up whether you want to pay the price quoted and let the market speak for itself, not through this pointless shower.

  • Comment number 15.

    Whereas in Britain the doctor would come to the house and the cost to the public purse would be about a hundred and fifty pounds!
    Which is more efficient?

  • Comment number 16.

    The plan is going quite well, the ESM has muscled its way into the position of lender of only resort.
    IMF to take over government income/expenditure, Portugal to nationalise their domestic banks and the ECB to take over the Portuguese Central bank.
    Repeat for Spain and Italy.
    Once the PIIGS are stabilised the European commission will take over from the IMF, Germany and France will cede control in the interests of unity and the rest of the EZ countries will be strongarmed in.

    One EU currency, One EU government, One EU central bank (that was always the plan)

  • Comment number 17.

    It's like watching a rain wreck in slow motion. The end result is inevitable now large parts of the population realise that corruption in the system has turned the money they trusted in into funny money that they have no confidence in whatsoever. Whilst the problem is global and systemic and will require root and branch reform it should be remembered that individuals are at the root of the problem as well. Under the new terms of reference the guilty should be held accountable for their sins.The alternative to root and branch change is global instability on a scale yet to be imagined. Whichever course is taken we will all find ourselves nowhere near as well off as we thought we were.Smoke and Mirrors are for magicians not financial systems.

  • Comment number 18.

    Burnallmoney - thanks for the link to the Peter Oborne article. Very interesting, and just a bit scary. I don't know enough to know if he's wrong or right, but it is in the Telegraph so I suppose that must mean it's all absolutely true and not influenced in the least by any ideological aversion to common currencies. I wonder if the late lamented WOTW ghost-writes his articles for him. They both seem similarly cheerful.

  • Comment number 19.

    Whether there is money or lack of it.
    Simply follow it.
    Who is going to make a profit?
    They are the ones driving this forward.
    Name the guilty parties.
    The innocents, us, pay.
    Time and time again.
    Who gains?

    Don't say that we gained whilst the going was good.
    The new gainers made a bundle then too.
    Win win win win for some.

  • Comment number 20.

    12. At 19:24pm on 29th Mar 2011, burnallmoney wrote:
    'The scary truth is that the scale of the problem facing the eurozone has been gravely underestimated by British commentators.'


    The scariest truth is the UK debt is being seriously underestimated - and nobody is telling it how it really is.

  • Comment number 21.

    Re 8 : I would not be surprised but I think a lot of Portugal’s ills are down to profligate public expenditure. I was struck by the huge amount of infrastructure spending - motorways (with little traffic), buildings etc and wondered who was paying for it? Turns out it’s everyone else.

  • Comment number 22.

    As someone else has mentioned, why are the ratings agencies still there? And why would anybody take anything they now say seriously? They were and still are beholden to their clients who have bent them every which way for their own purpose. Every time they make a statement there should be chants of "CDOs triple A" from everybody else in the room and wry smiles. What has happened to the proposal for a pan-European credit rating agency and why do these clowns at Moody's and S&P still exist after being so completely discredited along with the model of greed inspired usury, sorry financial services... same reason why all the bankers and traders are still snouts down in the trough I suppose... A LACK OF POLITICAL WILL TO DO ANYTHING ABOUT IT.... and the right documents no doubt.

    Downgrading Greek and Portuguese debt at the threat of a 'haircut'... wow, I wish I was one of these analysts on 100k plus. You earned your money there boys... same as the investors who will be bemoaning there loss of money over a bottle of fizz, well they were getting 7.5% whilst it lasted... no risk and all that...

  • Comment number 23.

    Well, we live in interesting times.

    The best result all round would probably be if the Portuguese actually refused a bailout. The resulting crisis following default; riots on the streets and partial collapse of the country would then at least silence the 'deficit deniers' in the UK and force a solution in the Eurozone.

    As to the wider impact, it wouldn't get too much worse for the UK. The biggest problem for the Eurozone would what to do about the bill of half a trillion euros the ECB would probably end up with.

    Thanks to the liquidity and market support polices of the ECB there are almost no 'bond holders' left. The people sitting with most of the PIIGS debt are the taxpayers in the rest of the Eurozone via the ECB. 'Transfer union' has already happened by default.

  • Comment number 24.

    Followed the link about Portugal in TV/radio reports at the top of the page, interesting stuff, but what on earth was happening at 02.20? Beans for tea the night before eh?

  • Comment number 25.

    The sooner pretty much everyone in the Euro wakes up and realise they are helping with Germany's economic boom, the sooner they can perhaps take up their sovereign currencies. In fact, if everyone returned to their sovereign currencies would the Euro continue to exist? (shades of 'if a tree falls when no-one is around does it make a noise'. Answers on a postcard please.

  • Comment number 26.

    EmKay, I'm not really sure that the problems Portugal faces now are in any way attributable to the success of the German economy. I admire Germany for rebuilding their economy and continuing to focus on high quality engineering.

    I'm not honestly sure what Portugal has focused on.

  • Comment number 27.

    #8 so you think Portugal is corrupt? You'd be amazed how much of that goes on in the UK as well! From top to bottom.

    The thing with people who report from exotic places is that their eyes are suddenly opened to things they take for granted back home.

  • Comment number 28.

    How long must we persist with the charade. Borrowing more debt to pay back debt. Its simply a delaying tactic, in the hope that growth will return from somewhere, or anywhere, to allow countries to service their debts. But it is a massive assumption. Where is the DEMAND? For growth you need demand. This requires consumers. But consumers are saddled with debt from the last 20 years, and worse inflation, the side effect of the US QE, is eroding what little money we have left. And thats ignoring the over accumulation of wealth that has occured. Demand is gone. An optimistic scenario is a 10 year dead patch similar to what Japan had in the 90s. A pessimistic scenario is no return to growth as peak oil arrives unfortunately at the same, debt repayments become unpayable, resulting in defaults and an even bigger banking collapse that no-one can bail out, and the dollar collapses Weimar style. On the plus side, we would have the perfect opportunity to get rid of our debt based monetary system.

  • Comment number 29.

    23. At 21:34pm on 29th Mar 2011, The_Ex_Engineer wrote:
    Well, we live in interesting times.

    The best result all round would probably be if the Portuguese actually refused a bailout. The resulting crisis following default; riots on the streets and partial collapse of the country would then at least silence the 'deficit deniers' in the UK and force a solution in the Eurozone.

    Default is absolutely necessary if debt is to be reduced to an affordable level. Its about time the bond holders took a hit instead of the tax payers. Afterall investment is supposed to be a risk.

  • Comment number 30.

    26. At 22:02pm on 29th Mar 2011, U14809524 wrote:
    EmKay, I'm not really sure that the problems Portugal faces now are in any way attributable to the success of the German economy. I admire Germany for rebuilding their economy and continuing to focus on high quality engineering.

    I'm not honestly sure what Portugal has focused on.


    Germany has had the benefit of an exchange rate based on a currency that is depressed by the poor performance of the periphery. These members have had the disadvantage of an exchange rate that is way too high for them. With floating exchange rates instead of the artificial fix of the Euro, different countries are able to attract different sorts of investment, make different kinds of export. In the case of the PIIGS, being in the Euro has been to the detriment of their tourism industry and of the low value added exports which are not competitive. Germany on the other hand has had a massive boost from the exchange rate not accurately reflecting the state of its own economy. Does this make my position clear?

  • Comment number 31.

    29. At 22:16pm on 29th Mar 2011, Averagejoe wrote:+++

    Default is going to happen one way or another. After all if money is being created out of nothing then ultimately the money will have to be destroyed in some way.

    In the UK the value of money is being destroyed by inflation.

    For the Euro members, the bail outs will reach such silly levels that in effect the euro will be worth a lot less, so again the same effect occurs.

    The problem is that in both ways it is ultimately the majority of people who get impoverished instead of the top few %.

  • Comment number 32.

    #18 JustKBO wrote:
    >>> Burnallmoney - thanks for the link to the Peter Oborne article. Very interesting, and just a bit scary[...] I wonder if the late lamented WOTW ghost-writes his articles for him.

    I hope he is not among the arrested. I'm sure he could do better writings on the wall than breaking windows :-)

  • Comment number 33.

    Portugal is really insignificant , in terms of scale . Spain is the one to watch...

  • Comment number 34.

    Interested to read the article by Peter Jones of The Telegraph (link from no 12. but rather worried that someone who comments on the world's financial crisis does not seem to know that the FSA guarantee on savings has been raised to £85,000 for three months now!

  • Comment number 35.

    In Portugal and Greece, tax evasion and corrupt handouts by politicians are as common as eating bread.
    Bailing them out will never stop. They must be given a stark choice. An effective tax system or out of the EU without trading rights.

  • Comment number 36.

    Steve @34.

    I spotted the mistake as well. That said, it was a nice piece, putting some worthwhile historical perspective on matters.

    As I've already said, I think it would do the World a favour for a significant developed country to default. It would very clearly establish what the consequences are. That is the only way we will ever be able to have a proper debate about Government finances.

    Talking to most people about the risk of government default is like talking to a child who has never been burnt. You can tell them "you don't want to touch that, it's hot" but the risk is hypothetical and abstract so they feel it can't really be that bad and don't give any real credence to the warnings...

  • Comment number 37.

    What's the problem? The eu has economically stronger and weaker members. Unless those weaker members strike oil, they presumably will remain weaker and require perpetual subsidies. No different from the regions in Britain being effectively dependent on the southeast's earnings. The alternative is relative poverty for the weaker states.
    So Germany's dilemma is how much to give and how well it will be spent forever, unless one's view of the eu is more cynical.
    Just a view.

  • Comment number 38.

    All this user's posts have been removed.Why?

  • Comment number 39.

    "Interested to read the article by Peter Jones of The Telegraph (link from no 12. but rather worried that someone who comments on the world's financial crisis does not seem to know that the FSA guarantee on savings has been raised to £85,000 for three months now! "

    Indeed a mistake.

    However if, as expected, the crisis spreads to Spain and the Spanish banking system, how would the FSA guarantees of £85,000 be paid if Santander found itself in deep trouble? Would it be the British taxpayer? If so, the larger the guarantee, the greater the risk to the British taxpayer.

    I cannot help thinking that it was an enormous risk to allow Santander to take over so much of the British banking industry by taking over several of the former Building Societies. As a nation we have swopped security for risk.

    In retrospect, all the Building Societies should have followed the example of Nationwide and remained a Building Society owned by the members. They didn't need a bailout during the banking crisis.

  • Comment number 40.


    At its core, capitalism is based on greed and selfishness. I am not saying everyone is selfish or greedy, but the survivial of capitalism is dependent on it. It is the thing that drives companies to chase more and more profit and for individuals to climb the ladder and earn more money.

    You highlighted the corruption that goes on in Portugal, and everyone knows it was wealthy people in Greece not paying tax that brought about their problems but what is the underlying cause ?

    Greed and selfishness. The more succesful people are, the richer they become, they more morally corrupt they become when it comes to paying taxes.

    Countries all over the world are going to go bankrupt in the next five years, but not because there is a lack of money...there is plenty of money, it is just in the hands of the super wealthy who move it all offshore and avoid tax at all costs.

    Sadly this problem will never be fixed, because capitalism reclassifies greed and selfishness as ambition and success..and whats wrong with that ?

  • Comment number 41.

    Re the above mentioned Telegraph piece, as a PIIG I found it fascinating. I was expecting some mention to "those damn dagoes" or something similar, though.

    Basil Fawlty would've been proud.

  • Comment number 42.

    I have asked where all the money has gone and this is an example of what people are saying.
    The point is yes I know the banks lost 'assets' because of falling house prices etc but fundamentaly all the money it lost it first of all had to lend. In otherwords the money went out of the bank in cash. yes they had assets bak which went down but the question still remains. Where did all that cash go ?
    Because it is a collosal amount.

    130. At 18:41pm on 30th Mar 2011, ChangEngland wrote:
    @113. At 16:23pm on 30th Mar 2011, gary cw wrote:

    I asked where the money had gone....

    But for the bank to get the " paper assets" they had to pay out with cash...

    No. You need to understand that the money did not exist before it was borrowed. So lots of borrowing is what creates all the credit and a credit crisis.

    A house worth 10,000 that suddenly increases in "Value" (not value really just price) to 100,000 needs someone to borrow this increased amount of money to acquire it.

    So they go to the bank. The bank say OK and Debit the buyers account by 100,000 (which they make up out of thin air by entering the numbers on their computer). They take your deeds as surety/guarantee. Now they have a asset of a 100,000 loan and surety - the deeds to a 100,000 house. They also have a liability of the 100,000 that the purchaser paid to the seller by crediting his account when the house was purchased.

    Now what happens when the price or Value of the house suddenly falls to 50,000? The buyer loses their job, and says "can't pay / wont pay", and has no other assets. So he walks away(in debt but who cares he has no chance of paying so he goes bankrupt). Now the bank have a 50,000 house and a liability of 100,000. The other 50,000 just vanishes! Back to thin air where it came from. Multiply by a few 10's of thousand deals and you have... bank bankruptcy. Their Assets have reduced in "value" but their liabilities have not. All because they created the money in the first place to satisfy the demand in a doomed and overheated boom.

  • Comment number 43.

    The inevitable Euro slow-motion car crash draws ever nearer.

  • Comment number 44.

    As an expat living in north-central rural portugal, I can tell you what the strength of Portugal is: The large (and largely poor) very diverse farming community know how to live off the land, with a few acres each. Portugal can feed itself. When the economic system crashes big-time (as it surely will), they will carry on pretty well as normal with their own well-water supplies, they will eat well, travel by donkey & cart if need be - while the rest of the world's city-dwellers in "advanced" countries will unfortunately go hungry. I recommend people read the signs, buy land in an agreeable climate, and learn how to live off it. Josh

  • Comment number 45.

    Looking back at the interest rates that the PIIGS borrowed money before they joined the Euro, we see the rates are remarkably similar to those being demanded by the market today. Polticians need to wake up and acknowlege that the Euro should never have been adopted by these countries. These countries need to leave the Euro now, allow their new currencies to depreciate and begin the healing process. Yes, there will be short term pain but at least it will cure the illness.

  • Comment number 46.

    I have just read the postings by 'onward-ho' on March 29 and 'Ne quid nimis' March 31. I have long held these views having lived in Germany for the past 10 years (now in UK). German manufacturing clearly functions very well but the Euro gave Eurozone domination to them on a plate. One size fits all interest rates ensured the boom and bust of the periphery, now the fact that Germany can borrow money cheaper than elsewhere completes the 'double whammy'. As 'onward-ho' commented, Support for economies like Portugal will flow back to the centre anyway when they buy German products. The most sensible plan is for the break up of the Euro and for countries like Portugal to begin economic rebuilding with a realistic exchange rate. The remaining core countries will then find a hugely revalued Euro more akin to 'the good old D-Mark as many Germans refer to it. A lot of industry which had been farmed out from Germany has been returning to Germany of late ( I know this from companies I have worked with). This return will be reversed as the costs in Germany return to their true levels and the process of economic levelling will accelerate. My feeling is that a lot of Germans enjoy a stunningly comfortable life, yes, created with efficient hard work but also very much as a result of post-war historical and geographical constellations and final icing provided by the Euro. Far from being a drain on Germany the Euro has provided Germany with the final master stroke, was it great strategic planning or good fortune? I have been in favour of the European project but feel it is clearly much more complex than just a political will.

  • Comment number 47.

    Many of these countries - just like the UK - have been borrowing ever increasing piles of debt. Those that are part of the eurozone eventually get bailed out by Germany as the only profitable member of the zone.
    By acting Germany has to bail them out earlier, but by a smaller amount, if the Germans can then force these countries to obey common sense then this smaller earlier amount might be the only bail out required. This is a bit like servicing your car - putting a pint of oil in now rather than waiting a week might seem extravagant, but wait that week and you'll need a whole gallon and possibly a new engine.


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