To watch the Portugal debt crisis unfold is to wish someone would whisper these old, wise words in her ear: “We have found the enemy and she is us.” That’s right: it’s not dismal debt ratios that will determine the troubled country’s fate, but its stomach for doing what it must.
To date, speculators have favored discussions of KPIs, of volumetric liabilities and key indicators of financial health. Yet, debt isn’t the real problem, just as bailout money isn’t the real solution (as its neighbor, Greece has proven).
The problem, simply, is ideology. Viable rescue plans are destined to fail because leaders won’t settle for merely staying afloat—even as the country’s ship is sinking, leaders heed the cries of her people and wait for a bigger, shinier life boat with nicer creature comforts to arrive.
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
The outlook for Portugal is tentative, not because the right maneuvers can’t help her overcome her debt, but because national sentiment echoes what was heard in Greece. Here is an alternative opinion on why Portugal’s ship might just keep going under, even if the numbers look good:
Worrisome Factor #1: Chinks in Her Government-Spending Armor
Though the IMF (co-lender of some €78 Billion issued to Portugal in April 2011) described the country as “broadly on track,” it added that the country lacked austerity in two large categories: public spending at the local level and financial controls for state-owned enterprises. A fund spokesperson said in December that it expected Portugal to return to public markets in 2013, but in February Goldman Sachs disagreed. The bank predicted bond default if the country cannot secure another €30 Billion in bailout funds.
Early optimism was further dampened in January when the country’s credit rating fell below investment-grade. Such factors make it clear that even 90% adherence to financial conservatism may not be enough. In this climate, even small examples of undisciplined spending will be amplified, making investors more skittish and speculators less confident.
Worrisome Factor #2: Better than Greece Does Not Equal Good
Speculators say one thing, but debt offerings say another. Some tout the likelihood of default as “low,” but investor confidence tells a different tale. In late January, 10-year bond yields for Greece climbed upwards of 30%; for Portugal, they stood at nearly 15%. But the bond yields of other seriously indebted nations (Ireland at ~8%, Italy at ~6%, and Spain at ~5%) combined with a look at healthy Germany’s 2% yields prove that Portugal is in serious pain.
It comes down to this: the Greek debt crisis is being treated as a benchmark instead of an outlier, skewing public perspective around how much hot water the Eurozone, and member countries are really in. Yet, investors are not mistaken—their risk tolerance becomes the market, and the market becomes the truth, and the truth is, Portugal is in serious trouble.
Worrisome Factor #3: The Labor Unions And the Temperature Of The People
Last Wednesday, Armenio Carlos, leader of Portugal’s largest labor union (the 700,000 member CGTP), publicly denounced proposed austerity measures, calling for the “renegotiation of debts, in terms of deadlines, in terms of interest and in terms of the amount.” For some Portuguese nationals, who are witnessing the most serious recession since the 1970s, the acute pain of tax hikes, budget cuts, and the elimination of two months of civil servant wages overshadow the threat of something worse.
The leader of the second largest labor union (the 520,000 member UGT) recently signed an accord agreeing to collaborate with the government and private industry on austerity measures. Yet, all workers may not be on board; the very same union spent most of the prior year publicly denouncing the same austerity measures.
What It Comes Down To
In order to save itself, Portugal must go beyond merely doing better than Greece—it must, in word and in practice, be prudent. “It is painful but this pain is unavoidable,” said Klaus Regling, head of the European Financial Stability Facility. “Countries that went through a bubble have to go to a new equilibrium, and that means a lower standard of living.”