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A couple of interesting snippets haven't been covered by most of the news reporters looking at the Portuguese debt crisis.
The first was the general headline that Portugal had applied for a bail-out. This was sometimes qualified in the body text, but "bailout", like "mull", is a conveniently short portmanteau and thus beloved by sub-editors for headlines.
In fact the interim prime minister Jose Socrates hasn't applied for a bailout, simply because, as head of a caretaker government, he does not have the authority to negotiate the terms of such a bailout. What he has applied for is the less headline friendly "financial assistance" or, in a short word, a "loan".
What's the difference between a loan and a bailout? Well, actually, quite a lot. A bailout covers a long period of time, and has reams and reams of terms and conditions attached. This is what the new Portuguese government post-June will negotiate. A loan (the thing which Mr Socrates is requesting) is in effect one of those "No cash until payday? Apply to EuroEasyLoan now! No collateral required!" kind of things.
Does this matter? Well, yes. Although the German government is keen enough to put through these rescue packages (the German people are less keen) it's not so clear-cut whether it wants to get into "lend him €30bn until payday" kind of thing, which is basically an unconditional handing-over of cash. For a start, once that money has been handed over it inevitably strengthens the hand of the recipients.
The second factor here is the European Stability Mechanism, that €700bn fund scheduled for implementation in 2013. You may recall that the announcement of this fund last year was almost enough to convince even me that the euro could survive. The pro-Europe spin guys have been pushing the fact that:
This is disingenuous to say the least. What the EU leaders decided at that Brussels meeting (referred to here a couple of weeks ago) was, in effect, that it would be nice to establish such a fund, but the nitty-gritty of how to do it could wait. The difference is the same as John Kennedy saying that the US would go to the moon (1960) and the US actually getting there (1969).
In fact, a decision on increasing the bailout guarantees of the temporary European Financial Stability Facility (EFSF) has been postponed until after the Finnish Parliamentary elections, coming soon to a Scandinavian town near you.
The EU leaders' statement also papered over the cracks as only the EU can do. You may recall that on the debit side of the equation the new Irish PM seemed to imagine that after conducting stress tests on Irish banks, the EU would magically cut the interest rate it charges on its loan to Ireland. I haven't heard much more about that since it became clear that something approaching another €50bn would eventually have to be pumped into the Irish banking system (€24bn of it fairly sharpish).
But there's a credit side to this as well. Incredibly, Finnish PM Mari Kiviniemi said that at the EU leaders meeting "increasing the guarantees under the ESM did not come up". Kivinniemi also claimed that there were "still alternatives to the additional guarantees". This is denial on the other side of the coin. Because I can't see how you can conjure up €700m on a wing and a prayer.
Now, it gets a little technical here, and I find myself writing about Eurostat, the European Statistical Office, something I never imagined would happen. But, as I understand it, Eurostat decided in January that the guarantees provided by euro zone countries would be added to their public debt. So, when Greece, or Ireland, or Portugal, borrows EFSF money, the principal is listed as debt on the part of the countries that guaranteed the loans. That debt is proportional to the size of the country's share in the ESF.
Let's stick with Finland for the moment. That means that its share of the €17.7bn Fund loan to Ireland is €333m. Let's assume Portugal needs a slightly larger amount. That would increase its funding costs to about €700m. If the fund was increased to €700bn (which all the EU leaders said a couple of weekends ago would be a jolly good wheeze) that would increase to approaching €2bn. There are 5.4m people in Finland, so I make that about €371 for every man, woman and child and about €700 for every economic producer. Whether that's a price worth paying is a matter for debate. It's certainly less than the Irish are being asked to pay, but that is, in a way, an academic question.
If we move to Germany, the numbers are exponentially larger. It would be contributing about €235bn to the enlarged fund, or about €5,000 in guarantees (and €500 in hard cash) for every economic producer in Germany.
This is a high price for the Germans to pay to save German financial institutions, because, to be blunt, this is what it's all about. France's business paper La Tribune indicated the schism that is beginning to appear between those who have a vested interest in maintaining the fiction that all of that money lent by German institutions to the peripherals will get repaid (leading members, Angela Merkel, all of the German banks) and those who think that shovelling all of this "rescue" money to the peripherals is an expensive way to help the German finance system continue to fool itself (leading members, nearly anyine in the EU who is not a bank).
La Tribune wrote that:
The only solution, it said, was to
Quite.
The first was the general headline that Portugal had applied for a bail-out. This was sometimes qualified in the body text, but "bailout", like "mull", is a conveniently short portmanteau and thus beloved by sub-editors for headlines.
In fact the interim prime minister Jose Socrates hasn't applied for a bailout, simply because, as head of a caretaker government, he does not have the authority to negotiate the terms of such a bailout. What he has applied for is the less headline friendly "financial assistance" or, in a short word, a "loan".
What's the difference between a loan and a bailout? Well, actually, quite a lot. A bailout covers a long period of time, and has reams and reams of terms and conditions attached. This is what the new Portuguese government post-June will negotiate. A loan (the thing which Mr Socrates is requesting) is in effect one of those "No cash until payday? Apply to EuroEasyLoan now! No collateral required!" kind of things.
Does this matter? Well, yes. Although the German government is keen enough to put through these rescue packages (the German people are less keen) it's not so clear-cut whether it wants to get into "lend him €30bn until payday" kind of thing, which is basically an unconditional handing-over of cash. For a start, once that money has been handed over it inevitably strengthens the hand of the recipients.
The second factor here is the European Stability Mechanism, that €700bn fund scheduled for implementation in 2013. You may recall that the announcement of this fund last year was almost enough to convince even me that the euro could survive. The pro-Europe spin guys have been pushing the fact that:
"Leaders of the European Union decided at their summit which concluded in Brussels on Friday on the establishment of a permanent stability fund for the euro zone countries." (HELSINGIN SANOMAT, Finland).
This is disingenuous to say the least. What the EU leaders decided at that Brussels meeting (referred to here a couple of weeks ago) was, in effect, that it would be nice to establish such a fund, but the nitty-gritty of how to do it could wait. The difference is the same as John Kennedy saying that the US would go to the moon (1960) and the US actually getting there (1969).
In fact, a decision on increasing the bailout guarantees of the temporary European Financial Stability Facility (EFSF) has been postponed until after the Finnish Parliamentary elections, coming soon to a Scandinavian town near you.
The EU leaders' statement also papered over the cracks as only the EU can do. You may recall that on the debit side of the equation the new Irish PM seemed to imagine that after conducting stress tests on Irish banks, the EU would magically cut the interest rate it charges on its loan to Ireland. I haven't heard much more about that since it became clear that something approaching another €50bn would eventually have to be pumped into the Irish banking system (€24bn of it fairly sharpish).
But there's a credit side to this as well. Incredibly, Finnish PM Mari Kiviniemi said that at the EU leaders meeting "increasing the guarantees under the ESM did not come up". Kivinniemi also claimed that there were "still alternatives to the additional guarantees". This is denial on the other side of the coin. Because I can't see how you can conjure up €700m on a wing and a prayer.
Now, it gets a little technical here, and I find myself writing about Eurostat, the European Statistical Office, something I never imagined would happen. But, as I understand it, Eurostat decided in January that the guarantees provided by euro zone countries would be added to their public debt. So, when Greece, or Ireland, or Portugal, borrows EFSF money, the principal is listed as debt on the part of the countries that guaranteed the loans. That debt is proportional to the size of the country's share in the ESF.
Let's stick with Finland for the moment. That means that its share of the €17.7bn Fund loan to Ireland is €333m. Let's assume Portugal needs a slightly larger amount. That would increase its funding costs to about €700m. If the fund was increased to €700bn (which all the EU leaders said a couple of weekends ago would be a jolly good wheeze) that would increase to approaching €2bn. There are 5.4m people in Finland, so I make that about €371 for every man, woman and child and about €700 for every economic producer. Whether that's a price worth paying is a matter for debate. It's certainly less than the Irish are being asked to pay, but that is, in a way, an academic question.
If we move to Germany, the numbers are exponentially larger. It would be contributing about €235bn to the enlarged fund, or about €5,000 in guarantees (and €500 in hard cash) for every economic producer in Germany.
This is a high price for the Germans to pay to save German financial institutions, because, to be blunt, this is what it's all about. France's business paper La Tribune indicated the schism that is beginning to appear between those who have a vested interest in maintaining the fiction that all of that money lent by German institutions to the peripherals will get repaid (leading members, Angela Merkel, all of the German banks) and those who think that shovelling all of this "rescue" money to the peripherals is an expensive way to help the German finance system continue to fool itself (leading members, nearly anyine in the EU who is not a bank).
La Tribune wrote that:
"A full 18 months after the outbreak of the Greek crisis, the 'peripheral' countries of the Eurozone…are sinking into recession and political crisis. In view of their weakness, they are condemned to face a triple punishment: a brutal course of austerity, the appreciation of the euro, which is already overvalued with regard to their competitiveness, and the mistrust of financial markets that force them to accept excessive interest rates.
The only solution, it said, was to
"reduce the burden on over-indebted member states, which means making the investors pay, or organize their exit from the Eurozone".
Quite.
