Europe lashes out over downgrades

Senior European officials lashed out at Moody’s on Wednesday, questioning the timing of the debt rating agency’s downgrade of Portuguese bonds this week and threatening new regulatory action against all three major rating agencies.

The high-profile criticism follows long-simmering European complaints about Moody’s and its two competitors, Standard & Poor’s and Fitch, centring on whether they have improperly attempted to influence policy-making in the ongoing debt crisis.

 

The Portuguese downgrade – four notches to “junk” status – comes amidst a heated debate over how hard to push private owners of Greek debt to delay repayments from Athens. José Manuel Barroso, president of the European Commission, questioned the timing, and said Moody’s was guilty of “mistakes and exaggerations”.

 

“I deeply regret the decision … and I regret it both in terms of its timing and its magnitude,” Mr Barroso said. “With all due respect to that specific rating agency, our institutions know Portugal a little bit better.”

On Tuesday, Angela Merkel, German chancellor, and François Baroin, French finance minister, sought to downplay Moody’s decision, saying it would not affect their decision-making.

But Mr Barroso’s comments, along with similar remarks Wednesday by Wolfgang Schäuble, the German finance minister, appeared a concerted change in tenor, with both men arguing that efforts to reduce the agencies’ power would gain momentum.

“We can’t understand the basis of this announcement,” Mr Schäuble said. “We have to break the oligopoly of the ratings agencies.”

(...) Rating agencies defended their decisions, with a Moody’s spokesman saying the agency’s continues “providing independent, objective assessments of credit risk on debt securities”. S&P said: “We are focused on our role of providing investors with an independent and globally consistent view of creditworthiness, based on our published criteria.”

Some analysts accused European officials of attempting to distract voters and financial markets from their difficulties in formulating an effective response to the crisis.
“EU leaders will be well advised to stop blaming ratings agencies for their own shambolic handling of the euro area crisis,” said Sony Kapoor, head of Re-Define, an economic consultancy.

The European complaints echo similar criticisms made by Washington in April, when S&P cut its outlook for US bonds in the midst of budget negotiations between the White House and congressional Republicans. At the time, senior US Treasury officials questioned the timing and accused S&P of being misinformed about the budget talks.

European officials have argued that downgrades have frequently coincided with high-profile meetings of European leaders – evidence, they believe, of agency politicisation.

(...) “The credit rating agencies are playing politics not economics,” said a senior EU official. “The timings of the downgrades are not a coincidence.”

http://www.ft.com/cms/s/0/23a44f2a-a7ee-11e0-afc2-00144feabdc0.html#ixzz1RQJg7sSJ

Portugal hits back at Moody’s downgrade

@ FT By Peter Wise in Lisbon

Portugal has hit back at Moody’s for downgrading the country’s sovereign debt to junk status, criticising the US rating agency for failing to take into account new austerity measures and a “broad political consensus” in favour of tough fiscal discipline.

The four-notch downgrade to Ba2 has dealt a blow to Portugal’s efforts to distance itself from Greece and is expected to increase the yield the country has to pay at an auction of up to €1bn ($1.4bn) of three-month treasury bills on Wednesday.

 

Portugal’s PSI equity index quickly fell 2.6 per cent and the country’s credit default swaps have hit a record of 850 basis points, up 80bp for the day. Spreads between Spanish and Italian sovereigns and Bunds are also widening, indicating contagion fears.

 

Vítor Gaspar, finance minister, said the ratings cut to below investment grade failed to reflect the unequivocal support of the main government and opposition parties for the country’s €78bn financial rescue programme. (...)

Pedro Santos Guerreiro, editor of the Jornal de Negócios business daily, said the ratings cut threatened to become a self-fulfilling prophecy, undermining the investor confidence Portugal needed to resolve its debt crisis.

The Left Bloc, a small leftwing party opposed to the bail-out, said the downgrade proved that tough austerity measures taken over the past year were not the solution to the country’s difficulties.

Moody’s said the downgrade reflected fears that Portugal would need to follow Greece in seeking a second bail-out.

Moves to involve private investors in a new rescue plan for Greece made it likely that the EU would require the same preconditions for Portugal, the agency said in a statement on Tuesday night.
This would discourage new private sector lending, decreasing the likelihood that Portugal could resume financing its debt in international markets in the second half of 2013, as envisaged in the bail-out agreement, Moody’s said.

The agency also cited “heightened concerns” that Portugal would not be able to meet the deficit-reduction targets it has agreed to in the rescue package.
This was because of the “formidable challenges” facing the new centre-right coalition government to cut spending, increase tax revenue, lift economic growth and support the banking system.

However, Mr Gaspar said the downgrade ignored the impact of an extraordinary tax on income announced last week, which was “proof of the government’s determination” to meet this year’s deficit targets by going beyond the bail-out agreement.

The one-off tax, which will require Portuguese workers to forfeit half of the extra one month’s pay they receive as a December bonus, is expected to raise more than €840m.

Mr Gaspar said the government was committed to meeting deficit-reduction targets ahead of schedule and taking additional austerity measures beyond those set out in the rescue agreement.

It would also accelerate the privatisation programme agreed with the so-called “troika” – the European Commission, IMF and European Central Bank. This would have a positive impact on the public debt and market confidence, he added.

 http://www.ft.com/cms/s/0/86e26194-a7a3-11e0-a312-00144feabdc0.html#ixzz1RKX7ERxY

Politicians battle over Portuguese bail-out

Campaigning for Portugal’s June 5 general election has exposed sharp differences between the two main political parties over how the next government should implement the country’s €78bn bail-out deal.

Both the Socialists of José Sócrates, caretaker prime minister, and the centre-right Social Democrats (PSD), the main opposition party, have signed up to a package due to be approved today by the European Union and the International Monetary Fund.

But divergences over how to achieve the targets set out in the three-year programme of tough austerity measures and economic reforms have raised concerns over how successfully and at what pace they will be carried out.

In a hard-fought campaign, with the two main parties virtually level in opinion polls, Mr Sócrates accused the PSD of using the EU-IMF deal as a pretext for proposing “the most radical rightwing programme ever put forward” in Portugal.

PSD plans to privatise state broadcasters, transport companies, financial institutions and water utilities and to “open state education and healthcare to private enterprise” went far beyond the bail-out agreement, said Mr Sócrates.

A PSD victory would put “social justice and equality of opportunity at risk”, he said at the weekend.

But Pedro Passos Coelho, PSD leader, said his election manifesto intentionally went “further and deeper” than the EU-IMF package in an effort to lift Portugal out of “the cycle of poverty” created by six years of socialist government.

Mr Sócrates’s election programme was based on the same policies that had brought the country to “the brink of bankruptcy”, he told PSD supporters in the Azores islands at the weekend.

Policy disagreements over painful deficit-reduction measures have been intensified by the latest EU economic forecasts. Portugal is the only European country projected to be in recession in 2012, with unemployment reaching a record 13 per cent and public debt exceeding 100 per cent of gross domestic product for the first time.

According to José Pacheco Pereira, a historian and senior figure in the PSD, the Socialists plan to “sidestep, postpone, evade and, in some circumstances, simply not apply” the bail-out deal.

Voters who wanted to “resist [the EU-IMF programme] and who believe that is possible” would vote Socialist, he wrote in a newspaper column.

Those who understood that it would have a “remedial impact on the role of state” and was, “in effect, Portugal’s last chance” would support the PSD.

Concerns over how effectively the next government will execute the bail-out agreement have been heightened by opinion polls suggesting that neither the PSD nor the Socialists would gain a clear majority in the election. Most polls give the Socialists a lead of 2-3 percentage points over the PSD, but the difference is within the margin of statistical error.

Mr Passos Coelho has ruled out serving in a government coalition with the Socialists. But the polls indicate his that preferred coalition with the small conservative Popular party would not command an overall majority in parliament.

Political analysts fear that attempts to form a majority coalition government after a close election result would involve protracted negotiations, possibly resulting in an impasse or another weak minority administration.

Mr Sócrates’s own minority government was defeated in parliament in March, triggering the political crisis that he says forced Portugal to ask for a bail-out.

Copyright

The Financial Times Limited 2011

@FT: Portuguese parties battle over labour costs

By Peter Wise in Lisbon

A fiscal “devaluation” included in Portugal’s €78bn bail-out package to cut labour costs has become one of the most disputed issues in the country’s election campaign.

T

he centre-right Social Democrats (PSD), the main opposition party, have embraced the measure to make companies more competitive by cutting social security contributions as part of their manifesto for the June 5 vote.

But the Socialists of José Sócrates, the caretaker prime minister, question how the reduction, and subsequent shortfall in public revenues, will be financed, estimating that it would need a three percentage point increase in the main value added tax rate to 26 per cent.

Although both parties have voiced support for the rescue package agreed last week with the European Union and the International Monetary Fund, the election row has exposed differences over how the three-year programme should be implemented.

The bail-out package envisages cutting corporate social security contributions by the equivalent of 3 to 4 per cent of gross domestic product over the next four years.

“This is a potential game changer,” said Poul [correct] Thomsen, head of the IMF negotiating team. “It replicates a currency devaluation by significantly reducing the labour costs of enterprises in one go.”

The level of reduction was “very, very dramatic”, he told the Financial Times last week.

According to the rescue agreement, the measure is to be financed in a “fiscally neutral” way through public spending cuts and tax increases to be “calibrated and developed in detail” over the next three months.

Eduardo Catroga, expected to become finance minister if the PSD wins the election, said on Monday the party proposed to lower employers’ contributions four percentage points in four years to below 19 per cent of workers’ wages.

Some goods and services would be moved to higher VAT rates to fund the measure, he said, but there would be no change in the basic rate.

The cut was targeted mainly at export companies in an effort to lift growth and create jobs, he added. Less competitive telecommunications, energy and other utility companies would be required to pass on the benefit in lower prices.

Francis Assis, a Socialist leader, warned that the PSD proposal would have a negative social and economic impact if VAT rates were increased. He did not say how his party would finance the make up the shortfall.

Pedro Passos Coelho, the PSD leader, said his party’s election programme went much further than the EU-IMF agreement in terms of public spending cuts and economic reforms.

Proposals not part of the rescue package include steps to privatise one of Portugal’s two state television channels, reduce the number of MPs from 230 to 181 and impose “peremptory limits” on the length of criminal investigations.

Copyright

The Financial Times Limited 2011.

FT: Portugal delays pain it knows is inevitable

Tuesday’s Portuguese rescue deal is being sold as a way to buy time. The €78bn ($116bn) package, agreed with the European Union and the International Monetary Fund, is welcomed because Portugal will gain a few more years to delay fiscal adjustment. But the victory will be short-lived, for fiscal problems alone are not what ails Portugal’s economy.

(SV comment: I wonder how many times people will repeat this until someone actually hears and has the guts to do something about it)

The IMF’s acronym is said to stand for “It’s mainly fiscal”. This maxim has certainly been applied by the IMF and the EU to Portugal, just as it was to the other struggling eurozone states. However, Portugal’s problem is one of foreign debt. Its ratios of public debt and deficit to gross domestic product are similar to France’s, yet France is not close to a fiscal crisis. This is because Portugal’s crisis is born not of public borrowing, but the debt of its private sector, in particular banks.
The limited importance of public debt alone is clear in Italy and Belgium. Both have high debt ratios, yet both pay smaller risk premiums because they run smaller current deficits. The case of Belgium is notable: the country has been without a government for the past year, yet faces a risk premium only fractionally above eurozone average.
The issue for Portugal is therefore avoiding more foreign debt. At the moment it is running a large current account deficit, likely to be 8 per cent of GDP this year. This implies that to avoid further external debt, Portugal (like Greece) must reduce consumption of foreign goods by about 20 per cent of GDP.
It is, of course, possible that Portugal will magic up an export boom, which would constitute a better solution. But while this path is preferable, it seems unlikely: Portugal’s biggest external market is Spain, which has its own problems. Exports could also be boosted by cuts in nominal wages – an internal devaluation – but this would take years to have an effect.

Here the experience of the Baltic countries shows what needs to be done. All experienced major capital inflows during the credit boom, which dried up when the 2009 crisis began. Latvia was hit especially badly, but recovered and can now access capital markets at reasonable rates. Having kept its policy of parity with the euro unchanged, it managed this feat by reducing labour costs by 17 per cent over two years. This created the base for export-led growth, but the bulk of the current account adjustment – a swing of more than 20 per cent of GDP – was achieved through an impressive contraction in domestic spending.
A similar contraction in Portugal is unlikely, however, so long as its households can still obtain credit from their banks. Given the ECB is refinancing banks in Portugal (as in Greece) at 1.25 per cent, mortgages there are cheaper than in Germany. The risk is that households will pay higher taxes, but continue consuming on credit. Because eurozone banks can refinance themselves cheaply through the ECB, they can keep lending, thus adjustment will be delayed.

This is why it is a mistake to believe that Portugal’s path to solvency comes only, or even mainly, through fiscal adjustment. Instead, as in Latvia, a reduction in private consumption is needed. To achieve this Portugal must tax consumption credit and introduce a temporary surcharge on value added tax.
Policies aimed at reducing consumption are, of course, highly unpopular. The Portuguese government has already shown that it prefers a “soft” adjustment, which preserves short-term political unity and delays pain for its citizens. But these policies only put off the day of reckoning. Continued external deficits will just increase foreign debt. Financial markets will then see the problem is not being solved, and thus will be even less likely to fund the country in future.

The ECB looks likely to finance Portugal for a while, but it already has enough potential losses on its book and thus cannot do this for long. And when it pulls the plug, as it almost certainly will, and the European funds run out, Portugal will then have to accept the inevitable. When it does, the adjustment will be even more painful, because its debt will have crept higher. Looking back, it might well come to regret not taking the pain today.

The writer is the director of the Centre for European Policy Studies, a Brussels-based think-tank

FT: Surprise poll bounce-back for Portugal PM

(No plus side to this one, only frustration, get real PSD and get moving. Embarassing to think the key responsible can get re-elected-Sara)

The centre-left Socialists of José Sócrates, Portugal’s caretaker prime minister, have leapt forward in an opinion poll to overtake the main opposition party six weeks ahead of a snap election. According to the Marktest poll published on Thursday, the party has gained 11.5 percentage points over the past month to poll 36 per cent of voting intentions against 35 per cent for the centre-right Social Democrats (PSD), whose share fell by 12 points.

The poll comes a month after the PSD and other opposition parties voted down a government austerity package, forcing Mr Sócrates to resign and triggering an early election on June 5.The political crisis aggravated the country’s sovereign debt difficulties, causing Mr Sócrates to submit a formal request for a European Union-led bail-out two weeks ago, making Portugal the third eurozone member after Greece and Ireland to seek a financial rescue.

TSF radio, one of the media groups that commissioned the poll, described the gain by the Socialists as a “historic recovery”.
The PSD, which Mr Sócrates blames for the political crisis and the bail-out, had previously enjoyed a strong lead in the polls. Since last September it had been consistently forecast to win an overall majority in parliament in coalition with the Popular party (CDS-PP), a small conservative group.
According to Thursday’s poll, however, neither a coalition of these two parties nor the Socialists would win an overall majority in parliament, raising the possibility of further political uncertainty after the June election.

In a separate poll for the Diário Económico newspaper earlier this week, 71 per cent of people surveyed said it was “very important” that Portugal had a majority government after the election. For the past two years, the Socialists have governed with a minority that can be defeated by the combined votes of the opposition.
According to the Diário Económico poll, almost 65 per cent of those questioned blamed Mr Sócrates most for the crisis and 58 per cent said the PSD should be part of the next government.

Pedro Passos Coelho, the PSD leader, has said he would be prepared to form a coalition with the Socialists, but not while Mr Sócrates was the party’s leader. However, more than 97 per cent of delegates to a Socialist party conference two weeks ago backed Mr Sócrates as their leader and candidate for re-election as prime minister.

In an editorial on Thursday, the Público newspaper said crises within the two main political parties and their failure to reach compromise agreements with each other were the main causes of Portugal’s political and economic difficulties.
The Socialists had closed ranks behind Mr Sócrates and “obliterated internal debate”, the paper said. Conversely, internal divisions within the PSD and a series of “own goals” were threatening what should be “an easy election victory” for the centre-right party.

http://www.ft.com/cms/s/0/93c8ae48-6bfa-11e0-b36e-00144feab49a.html#ixzz1KAD1bYNM

Diario Economico: Opposition Leader says limited room for maneuvre

Passos Coelho, the PSD leader, said this morning in a forum that he expects a 4 year package with further austerity measures for the state
Pedro Passos Coelho has admitted this morning that the country has a limited bargaining room with the troika, given the package needs to be closed by early May. "The margin to negotiate is very small. Portugal should have asked for help earlier.", said the PSD leader. "Austerity can not be for the people, it must be for the State now", is one of the principles, explained Pedro Passos Coelho, at the moment sitting with the IMF, ECB and the European Commission.

The third bail-out @ The Economist

IT MAY have been inevitable, but it was a sad moment for Portugal: Europe’s oldest nation state brought low. In a prime-time television address on April 6th, after months of denial, Portugal’s caretaker prime minister, José Sócrates (pictured), at last admitted what had long been obvious to everyone else: his country needed a rescue loan from the European Union.

Portugal now joins Greece and Ireland in the euro zone’s intensive-care ward. Its public debts are nowhere near as monumental as Greece’s; its banks not as reckless as Ireland’s. It has succumbed because of a humdrum failure to rein in wage increases and to modernise a bureaucracy schooled in tallying the quiet remains of the first global empire, as well as an inability to coax upstanding family companies, which for centuries have crafted textiles, ceramics and shoes, into competing with the Chinese. As a result, harsh as it may seem, a country whose collective memory is still scarred by the austerity demanded by the IMF in the early 1980s must once again subject itself to tough reforms demanded by foreigners.

(...)

But whether Portugal’s capitulation marks a turning point in the euro zone’s crisis depends at least as much on decisions in Brussels as on those in the Iberian peninsula. Getting Portugal’s reform package right is the priority. The country surely has some financial skeletons: countries that borrow so heavily while growing so slowly usually do. But its main problem is a lack of competitiveness—which suggests a greater need for structural reform than for austerity. So top billing should go to deregulating cosseted industries and reforming the labour market. Portugal, one of the rich world’s most rigid economies, must become one of the more flexible. Greece’s experience shows how hard this will be.

See full article at http://www.economist.com/node/18530121

FT: Drawing a line in the Iberian sand

(...) The caretaker government in Lisbon did nobody any favours by flipping from denying the need for a rescue loan one day to requesting one the next. Markets may have seen it as a fait accompli that Lisbon would eventually go cap in hand to the European financial stability facility: sovereign bond yields hardly moved on Thursday. But it further complicated a political challenge that was going to be hard enough as it was. Within Portugal, it is doubted whether the caretaker government – which lost a parliamentary vote of confidence last month – has the constitutional authority, let alone the political legitimacy, to commit the country to the kind of conditions a loan from the EFSF would entail. This is especially so since the political class has miserably failed to reach a consensus on the deficit-cutting measures the country can no longer delay. And Portugal’s eurozone partners will not find it politically possible – nor should they – to advance the funds without such conditionality, even if only to jump refinancing hurdles reached before a new government is elected in June. (...) For Portugal, that willingness is a bigger “if” than even for Greece. Lisbon has shown little appetite for the necessary belt-tightening and structural reforms of the economy to restore its long-lost ability to grow. The rest of Europe should be ready to extend rescue loans, but before it does so, it must demand that Portuguese politicians use the election campaign to seek a mandate from the people for a programme of reform. If this is achieved, and a loan is granted, all sides must accept that if the loan conditions are not met, aid will stop and a default triggered. Getting the Portuguese rescue right matters for all of Europe, and most of all for Spain. Madrid has done all that Lisbon has not: it has taken drastic measures to cut the deficit, embarked on reforms to make the economy more efficient, and spared no effort to communicate with bond investors. There is no solid reason why Portugal’s failure should reflect on Spain. Undeserved as this would be, however, it cannot be excluded. Spanish banks are overexposed to Portugal.