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EU Summit Begins In Post-Portugal Collapse Chaos: What, If Anything, To Expect; A Look At Portugal's Imminent €70 Billion Bail Out

Tyler Durden's picture




 

Goldman's Dirk Schumacher summarizes what to expect out of the EU Summit which begins today, and why following yesterday's Portuguese government collapse, it may well be another toothless formality:"Yesterday's resignation of the Portuguese prime minister Socrates, after
parliament rejected the government's consolidation program, does not
necessarily imply that EU leaders will not be able to take any decisions
at today's summit...The resignation of Socrates, however, may now mean that it will take
longer before the Portuguese parliament will be able to vote on todays
summit outcome - how long will depend on whether there will be early
elections or whether the current parliament will be able to form a new
government. According to Portuguese law new elections cannot take place
before 55 days after the parliament was dissolved and it may then also
take a few weeks to form a new government
." In other words, any decisions made today will not be ratified for at least two months, long after Portugal will be in dire need of funding to roll its April maturities, as has been long discussed on Zero Hedge.

From Goldman Sachs:

EU summit starts today. Government heads of the EU27 will meet today and tomorrow in Brussels to discuss, and approve, the reform of the EFSF, the establishment of the ESM as well as the reform of the economic governance of the Euro-zone. Earlier this week, finance ministers already agreed on several details which now need to be approved by government heads.

One topic that apparently needs further discussion is the schedule for capital payments into the ESM. After a meeting with coalition MPs in Berlin chancellor Merkel now seems to prefer a reduction of the initial capital injection of €40 billion in 2013, though there seems to be no disagreement that the final capital base in terms of paid-in capital of the ESM should be €80 billion as agreed by finance ministers earlier this week.  

Yesterday's resignation of the Portuguese prime minister Socrates, after parliament rejected the government's consolidation program, does not necessarily imply that EU leaders will not be able to take any decisions at today's summit. It was clear from the beginning that any decision by government heads taken today would need to be approved later by parliaments in any case. The resignation of Socrates, however, may now mean that it will take longer before the Portuguese parliament will be able to vote on todays summit outcome - how long will depend on whether there will be early elections or whether the current parliament will be able to form a new government. According to Portuguese law new elections cannot take place before 55 days after the parliament was dissolved and it may then also take a few weeks to form a new government. 

And a press release just issued from the Open Europe think tank summarizes why the next step, the bail out of Portugal, will cost E70 billion, to start.

New Open Europe briefing: Portuguese bail-out could amount to €70 billion

With EU leaders meeting today in Brussels in a bid to agree a new ‘grand bargain’ to save the eurozone, Open Europe has published a briefing arguing that Portugal looks set to be the next country to apply for a bail-out from the EU and the IMF.

Yesterday, the Portuguese government failed to win parliamentary approval for fresh austerity measures, leading the Prime Minister, José Sócrates, to resign, putting renewed pressure on Portugal’s finances. This could leave the country without a permanent government for months, as new elections are not expected until May, at the earliest – hugely complicating any bail-out negotiations.

Open Europe estimates that to cover Portugal’s deficit and bond repayments for three years, the bail-out would have to be between €60bn and €70bn.

However, the briefing argues that a bail-out is unlikely to solve any of Portugal’s fundamental problems and it would be cheaper for the country to move straight to restructuring, combined with a limited cash injection from the EU and IMF.

Portugal’s problems also illustrate why the reform package discussed today by EU leaders will not stamp out persistent tensions and increasing divergences between different countries within the eurozone.

Open Europe’s economic analyst Raoul Ruparel said:

“A bail-out of Portugal now looks virtually inevitable. But the cases of Ireland and Greece clearly illustrate that the EU’s strategy – to throw good money after bad – is failing. Rather than simply taking a bail-out, it would be better in the long run for Portugal to restructure its debt.”

“A Portuguese restructuring package rather than just another bail-out would shift some of the cost away from taxpayers and onto investors. It would also allow Portugal greater flexibility to achieve the necessary reforms needed for long term stability.”

“A new Portuguese government will have a clean slate on the issue of economic reform. It should use this fresh start to tackle underlying problems facing the economy through a debt restructuring, rather than just taking on more high priced debt in the form of an EU bail-out.”

To read the full briefing, click here:
http://www.openeurope.org.uk/research/portugalrestructure.pdf

Key points:

·         Portugal is getting ever closer to asking for a bail-out. Following the resignation of Prime Minister José Sócrates, after a series of austerity measures were voted down by Parliament, Portugal is now without a permanent government. Due to constitutional rules an election is not expected until the end of May.

·         In 2011, the country needs to refinance 25% of its national wealth – in relative terms, this is even more than Greece. The country’s borrowing cost has been above 7% for 38 consecutive days. Greece and Ireland lasted 13 and 15 days respectively at these kinds of rates before asking for a bail-out.

·         We estimate that a bail-out package for Portugal would need to be between €60 and €70 billion. This should allow Portugal to cover all bond repayments as well as any government deficits for three years.

·         However, a bail-out is unlikely to solve any of Portugal’s fundamental problems. Both Ireland and Greece are already looking to renegotiate their bail-out terms. This illustrates that short term loans are simply not sufficient.

·         Portugal’s cost competitiveness relative to Germany has decreased by 21% since the introduction of the euro. An increase in ECB interest rates, which is widely expected next month, will also lead to a decrease in the availability of credit and domestic demand in Portugal. This could cause Portuguese GDP – already estimated to shrink by 1.4% in 2011– to contract further.

·         Although we expect a bail-out, we believe a more viable solution would be to restructure some of Portugal’s debt. In the long run this may prove cheaper despite a larger initial cost, since, unlike in the case of a bail-out, it would cut Portugal’s debt rather than increase it. It would also reduce the burden on taxpayers, instead transferring more of it to investors. Crucially, the longer Portugal waits, the costlier a restructuring will be for the country, since its debt is expected to continue to build up over the next three years.

·         In order for a restructuring not to spread contagion to Spain, it would be best to combine it with a limited bail-out, which would involve smaller contributions from member states, since more of the cost is borne by investors.

·         The hope is that Portugal will use the cash and breathing space, freed up through a restructuring, to invest wisely in its own economy, including pushing through more economic reforms. However, the country will still be stuck with an over-valued currency, and the unanswered question of whether it can ever become competitive as long as it shares a currency with radically stronger economies such as Germany. 

 

 

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Thu, 03/24/2011 - 07:12 | 1094320 JLee2027
JLee2027's picture

All is well, no need to panic

 

http://www.youtube.com/watch?v=zDAmPIq29ro

Thu, 03/24/2011 - 07:12 | 1094321 sudzee
sudzee's picture

We need the chart guys to get to work on the "actually printed physical fiat printed for the masses verses the digitized pysdo-fiat (enslavement devices) typed up for gov'ts and banks (prisonmasters).

 

Thu, 03/24/2011 - 07:17 | 1094330 Thorlyx
Thorlyx's picture

What's another €70 Billion ?

Just peanuts these days. Wake me up when you are talking €70 Trillion.

Thu, 03/24/2011 - 07:27 | 1094347 They_Live
They_Live's picture

A few €70 Billions here, a few €70 Billions there and pretty soon you're talking about a large sum of money.

Thu, 03/24/2011 - 07:19 | 1094337 Tulli
Tulli's picture

Meanwhile, Portugal's benchmark stock index, the PSI-20, is up 1%.

It's all good.

Thu, 03/24/2011 - 08:51 | 1094597 A Man without Q...
A Man without Qualities's picture

The markets can remain irrational as long as Bernanke wants them to...

Thu, 03/24/2011 - 07:22 | 1094342 Azannoth
Azannoth's picture

"Portugal's cost competitiveness relative to Germany has decreased by 21% since the introduction of the euro"

Why put more lipstick on this Pig, just get rid of the Euro and be done with it

Thu, 03/24/2011 - 07:36 | 1094358 Snidley Whipsnae
Snidley Whipsnae's picture

EUR/USD = 141.32 Now...

Little, if any, dollar strength. Which one is the bigger pig?

Thu, 03/24/2011 - 07:29 | 1094351 Id fight Gandhi
Id fight Gandhi's picture

World markets rally on more euro country failures. Makes sense.

Btw how is Ireland going to pay more than 10% on their bonds?

Thu, 03/24/2011 - 07:30 | 1094354 FischerBlack
FischerBlack's picture

Socrates? I thought Bill and Ted sent him back to ancient Greece after their project!

Thu, 03/24/2011 - 07:34 | 1094357 Seasmoke
Seasmoke's picture

what the heck is the end game here.....what are they trying to accomplish (besides kick the can down the road !)

Thu, 03/24/2011 - 07:43 | 1094370 Snidley Whipsnae
Snidley Whipsnae's picture

Kicking the can is the only option left...imo...The azz hats have never had a 'grand conspiracy'... Instead they have played for one more day in the sun...and continue to do so.

"Occam's razor (or Ockham's razor[1]), often expressed in Latin as the lex parsimoniae, translating to law of parsimony, law of economy or law of succinctness, is a principle that generally recommends selecting the competing hypothesis that makes the fewest new assumptions, when the hypotheses are equal in other respects. For instance, they must both sufficently explain available data in the first place."

Thu, 03/24/2011 - 07:44 | 1094374 Azannoth
Azannoth's picture

Maybe they believe or KNOW something about the 2012 prophecy(maybe an impending Global catastrophe) so they are holding on to the best seats on the Titanic

Thu, 03/24/2011 - 07:47 | 1094393 PY-129-20
PY-129-20's picture

They are just trying to make me more sad and angry. All German politicians are alike. They all want to bailout. Meanwhile, my countrymen are getting poorer and poorer by the minute. Public baths, schools - everything is closed down these days. The pot-holes in the streets are getting bigger and bigger. This won't end well.

 

Thu, 03/24/2011 - 09:25 | 1094754 Stimme der DDR
Stimme der DDR's picture

Alles wird gut. Someone will come and bailout us. It happened before. 

Thu, 03/24/2011 - 07:36 | 1094359 ivars
ivars's picture

Strange, but it really seems that bad news are propping stocks up by pushing USD down. It should have been EUR that goes down with Portugal, should it not? But it does not, USD does.

I am perplexed...Can not be that Feb 18th max in DJIA will be overreached...Although a short spike is always possible, but there is no reason behind it.

 

Thu, 03/24/2011 - 07:46 | 1094385 Thorlyx
Thorlyx's picture

at least, gold and silver go up. Not all thermometers are broken.

Thu, 03/24/2011 - 07:45 | 1094389 Snidley Whipsnae
Snidley Whipsnae's picture

Perhaps we have better printers? Or, more printers?

Take a look at these adjusted monetary base, M2 and MZM charts at Jesse's...

http://jessescrossroadscafe.blogspot.com/

Thu, 03/24/2011 - 07:48 | 1094397 Watauga
Watauga's picture

Anyone--given the mess that is Europe (Greece, Ireland, Portugal, Spain. . .), why is the EURO climbing?  It appears that the collapse of the EU is a foregone conclusion, with Germany, perhaps, surviving as a strong, viable power.  The rest of Europe would seem to be on its deathbed.  So, why is the EURO higher?

Thu, 03/24/2011 - 07:51 | 1094407 Quintus
Quintus's picture

It isn't climbing.  This is simply an optical illusion caused by the dollar falling slightly faster than the Euro.

To get a proper perspective, look at Gold and Silver priced in Euros.

Thu, 03/24/2011 - 08:03 | 1094448 T0mmy
T0mmy's picture

People using euros ca. 320 mio

10 mio of them are portugese

11 mio of them are greeks

and about 5 mio are irish

so this problem is at the moment not much bigger than the unification for germany 22 years ago

Thu, 03/24/2011 - 08:28 | 1094512 edotabin
edotabin's picture

It isn't the number of people. It is how much they have spent that is disproportionately high .

Thu, 03/24/2011 - 08:26 | 1094506 edotabin
edotabin's picture

The USD will rally when the US declares bankruptcy.

What part of "huge scam" is perplexing?

None of this stuff can be trusted. The manipulations appeal to the absolute lowest common denominator at this point.

Thu, 03/24/2011 - 08:56 | 1094633 JLee2027
JLee2027's picture

The USD will rally when the US declares bankruptcy.

That declaration would end the USD.  It will not happen that way in my opinion. The system comes apart first, by force.

Thu, 03/24/2011 - 10:13 | 1094933 edotabin
edotabin's picture

Not necessarily. It is very posssible to say "F YOU" to creditors and still float the currency.

 

Ultimately what I'm saying is that debt is being used as a weapon to unite European nations into a single country (essentially). That is the overarching goal. This can also be seen by the  lies that were sold/told to the people concerning the constitution, the fact that it was voted against by the people of a variety of nations etc. etc. etc. Funny how nobody was really collapsing prior to the "constitution". Once people voted "correctly" then the financial portion kicked in.  The exchange rate of the Euro is kept high so as to instill some confidence not because it is worth anything or because of the crap analysts are blurting out. It is all a crock.

The system coming forcibly apart: Can't be certain anymore. We are living in such a financial la la land as it is. If it hasn't fallen apart already..... Even a 5 year old wouldn't buy all the garbage that is being spewed by "respected" analysts.

 

Thu, 03/24/2011 - 11:02 | 1095222 tired1
tired1's picture

 think you're correct  Rational benchmarks such as: Debt to GDP, default seems to be of no use. The pols get another day in the sun while the global banks exchange binary digits for secured sovereign assets.

Thu, 03/24/2011 - 08:44 | 1094568 Josephine29
Josephine29's picture

They would have been much better off in Portugal if they had taken the advice on Notayesmanseconomics and called for help last September..

On and on it goes...

Thu, 03/24/2011 - 11:17 | 1095321 tired1
tired1's picture

Got to careful when useing 'they' and 'we' these days. It's more important to which clan, tribe or org one belongs; it seems that the concept of nation states means little.

Thu, 03/24/2011 - 08:45 | 1094583 A Man without Q...
A Man without Qualities's picture

One of the things going on in the background are all the tricks employed to make the deficit look better than it really is.  There's pressure to privatize state assets, but they can't afford to clean up the accounts, so they are kind of stuck.  

Thu, 03/24/2011 - 08:57 | 1094631 sangell
sangell's picture

Oh really. Not too surprising I guess. I fail to see how 'restructuring' helps anything either as, given Portugals external debt that would feed right back to Spain and with three Pigs at the EFSF trough there won't be enough to feed the Hog of the bunch.

 

Thu, 03/24/2011 - 09:10 | 1094627 Negro Primero
Negro Primero's picture
Tripartite Social Summit - Today's Press Conference

 

http://video.consilium.europa.eu/index.php?pl=3&sessionno=3356&lang=EN

Thu, 03/24/2011 - 11:52 | 1095478 Ahmeexnal
Ahmeexnal's picture

Will Portugal be FORCED to "sell" her gold?

Will Sarkozy, in another of his napoleonic pipedreams, invade Spain and Portugal?

http://www.historyofwar.org/articles/campaign_french_invasion_spain_1808...

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