The Greeks were liars and the Irish couldn’t say no to their bankers. So how will we explain it away when Portugal hits the wall?
Just two months after Ireland’s bailout, investors are rattling the next weak link in the euro chain. Portuguese 10-year government bonds now yield a bruising 7%, more than double the rate in export powerhouse Germany.
It gets worse. Portugal last week paid 3.7% for debt that matures in just six months. That’s 18 times what the U.S. government pays to borrow for that length of time. On Wednesday, Portuguese officials are scheduled for another lap with the loan sharks.
Recognizing that a country growing anemically and running a huge budget deficit can’t long afford premium interest rates, market commentators are throwing in the towel. Portugal is “quietly insolvent” and likely to tap the European bailout fund soon, Citigroup Global Markets economist Willem Buiter wrote in an exhaustive report this month.
It’s tempting to write off Portugal as just another casualty of the ill-considered euro experiment, and it is certainly that.
But the Portuguese mess also bears some unwelcome likenesses to the United States. At the very least, it looks more like the U.S. than do its forerunners in the European bailout camp.
Unlike Greece, Portugal isn’t typically portrayed as a basket case plagued by corruption and a huge black market economy. Unlike Ireland, it didn’t drink the property bubble Kool-Aid and then try to twist the entire economy to bail out the bankers and their bondholding enablers.
Instead, what Portugal has is a persistent government budget deficit, a deeply indebted private sector and a program of austerity that so far favors talk at the expense of action. The country also has a lot of government debt floating around out there, much of it held by foreigners who are apt to grow impatient at an inconvenient time. A top central banker recently said Portugal’s public debt path is “unsustainable.”
Does any of this ring a bell?
This is not to understate the huge differences between the United States, a rich economy that has shown great flexibility, and Portugal.
Most important, the Federal Reserve can cushion the U.S. economy against shocks by printing more dollars, which have the added advantage of being the world’s reserve currency. Portugal, as part of the euro zone, has its hands tied on that front and is stuck with an exchange rate that makes more sense for the German economy than for its poorer neighbors.
And there is no downplaying the yawning growth gap between the United States and Portugal. The U.S. economy appears to be gaining some traction, and some market sages expect it to grow at a 3%-4% clip over the next year or so, on top of the 2%-plus expansion of last year. In Portugal, by contrast, growth was just 1.6% or so last year, and Buiter expects an outright contraction of 0.9% in 2011.
So Portugal’s imminent demise into bailoutland doesn’t signal anything like a pending run on U.S. financial assets. For now, probably just the opposite, as stress in the euro area banking system pushes more money into the dollar and other safer currencies.
At the same time, the exercise shows just how much is riding on the United States hitting rising growth targets. Should the U.S. recovery falter, similarities between our economy and theirs start to look a bit less far-fetched.
And regardless of how we fare on the growth front, the bond vigilantes are surely headed our way – and soon — unless U.S. policymakers agree to a plan to slash spending. It may be a few years — or then, as Alan Greenspan has been saying, it may not.
“Absent the will and the institutional capacity to tackle healthcare expenditure, in particular, but total public spending pressures in general, it is inevitable, in our view, that the U.S. will ultimately run into painful market discipline,” Buiter writes.