Household accounting

Soon for sale (cheaply!)

The nice gift loan we got from the Troika of a potential 78 billion euros has avoided the Portuguese state going bankrupt.  For now.

When the yearly interest rate on loans - to finance the never ending rising public expenditure - became unsupportable on the free markets, it was around 7%.  In some instances the lenders now want around 14%.

Thus the 4-5% yearly interest rate Portugal must pay on the 78 billion is comparably a good deal.  The time to pay back the loan varies according to the source.   The Europeans (2/3 of the loan) are asking for 4% and an average pay back time of 12 years.  IMF is asking for 5% (variable) and an average 7.25 years.

To make it more simple let us say 10.5 years average to pay the loans back.  We can then calculate the yearly interest at ~3 billion a year.  Close to 2% of the national GDP.

And here are the big news in the MSM today:  "Portugal will have to pay 34 billion in interest on the 78 billion loan", and one maybe not so naive reader exclaimed:  "That is close to to 50% interest!", well it isn't.  And then again - it is, if you look at the whole period.  Economists have also claimed, "We may not use the entire loan".  The chance of that happening is probably smaller than the guilty corrupt politicians admitting and paying back what they have stolen.

And do not forget we have to amortize the loan.  That is, we should pay an additional 7 billion a year.

All in all, we are talking above 6% of the current GDP every year during ten years going to pay just this debt.  As the state is responsible for half of the GDP more or less - it consequently corresponds to a massive ~12% of the state budget.

On top of that, there there is additional interest and amortization on other larger (all together) loans owed by the Portuguese state (by us).  After all, the public debt looks soon to be above 110% (depending on sources) of the GDP.

Furthermore, we have to add the yearly deficit of the Portuguese state.  Last year 8,6%, this year ~4,5% and next year ~3% if everything goes as planned.   You see, the public debt is not even becoming smaller - it is still growing.  In the near future for sure and perhaps even (much?) longer.

Additionally, the economy is contracting. The GDP might be 170 billion this year, but according to official expectations will be 168,5 billions next year with a growth of -3%.  The "Larsen rating bureau" and other cynic realists, on the other hand expect something closer to -5%.  Or Larsen will have to eat his old hat.

Income is going down and expenses are going up.   Our big neighbor, Spain, and the next country over, Italy, are currently both in trouble.  And we are all on the financial bookmaker's world wide top 10 to default (go broke) and the rating agencies have nearly all given Portugal junk status.

If you ask me, I can't see how a Portuguese default can be avoided.  Considering the simple but revealing accounting above, the international financial crisis, Portugal's financial super crisis, the paralysis of the EU, the international mistrust, the lack of growth, the bankruptcies of families, the bankruptcies of businesses, the despair of the people and the politicians lack of any common sense and the resulting lack of pro-active action - the outlook is bleak indeed.

I have a cold and my eyes are in tears.  I am glad to have that excuse. 

The end of the beginning of the end?

Hat tip, Morning Herald

Italian 10-year borrowing costs touched a new record of 6.71 percent on Tuesday.  This is above the yield levels where Ireland, Greece and Portugal issued their last bonds.  The massive Italian public debt is 120% of the GDP.  The second highest in Europe.  The Italian political system is ridiculed and the Italian prime minister a clown.  Check out the reaction of Merkel and Sarkozy below:

French/German smirk

Not even the strong companies or the rather low level of private debt of Italy may be able to save the situation.  See 10 problems here.

Interestingly, Italy was not particularly affected by the financial crisis. The yearly public deficit only went up about 1%. The reason for the large deficit are thirty years of deficit every single year.

If Italy succumbs then the crisis will become much more serious.  How can Europe afford a bail-out of Italy?  Europe may need a new Marshall plan.  But there is nobody around to provide one. When Italy goes all of the piigs will go together.  It could be the end of the common currency.  The end of the EU and a world wide real crisis.

If you have a few euros - go swap them to gold.  Then use the gold to buy a farm.   Sustenance farming is the future in Europe.

Going broke, the odds are in

The financial markets at this moment gives us the probabilities on countries defaulting.  The top 10 candidates are:

1. Greece
   86.58%
2. Portugal
   58.79%
3. Venezuela
   50.46%
4. Pakistan
   48.55%
5. Ireland
   46.79%
6. Argentina
   46.48%
7. Ukraine
   41.00%
8. Italy
   35.82%
9. Hungary
   31.06%
10. Spain
    29.16%

The PIIGS are all in the top 10.  Otherwise it would be disappointing.   To people who love to be at the top of lists.  The presence on this one is no reason for pride.  The company neither.

Here is an interesting article from the University of Liverpool:  Greece and the risk of contagion to the rest of the Eurozone.  Not exactly comforting reading considering the historical perspective

To the Expresso (portuguese newspaper) journalist, who tries to show that the English acronym for Portugal, Ireland, Italy, Greece and Spain is GIIPS:  Good try.  Unfortunately it is PIIGS, even more unfortunate, deservedly so.

Excerpt from the blog: Stock Market Today - European debt crisis: dark clouds to destroy City Buildings, an essay worth while a read in spite of the poor English (machine translated?).

state failure

PIIGS five countries in the face of the euro area debt crisis, the government is often slow to respond, response inadequate. In the state of electoral politics, has gradually taken shape in a time when the debt crisis, political parties and those in power to pursue short-term interests, often in the general election and opinion polls to please, to fool people. For example, the Greek government in 2009 before the last hiding a lot of deficit. Continue to ferment in the occasion of the debt crisis, the relevant national government often hold “step by step” mentality, too timid, failed to deter the debt crisis in the bud. For example, the Italian government deficit reached 5.3% in 2009 did not take decisive action, but blindly delay, leading to the current escalation of the crisis situation. When a crisis is approaching, the state has survived the dangerous move misconduct, leading to deterioration of the situation. For example, Ireland, Spain and other countries initially laissez-faire domestic economic bubble, the bubble burst, they spend a lot of taxpayer wealth to aid the virtual economy, leading to the economic situation worse.