• Facebook
  • Facebook
  • Facebook
  • Facebook

Search This Blog

Visit our new website.

Thursday, April 11, 2013

Who’s next in line in the eurozone crisis? Portugal and Slovenia are the prime candidates

In anticipation of tomorrow's eurozone finance ministers meeting (which will discuss finalising the Cypriot bailout and potentially extending the bailout loans given to Portugal and Ireland) Open Europe has published a new briefing looking at who might be next in the eurozone - our prime candidates are Portugal (for the second time) and Slovenia.

Key points

Both Portugal and Slovenia could need external assistance of some sort.

  • Domestic demand, government spending and investment are contracting sharply, leaving the country heavily reliant on uncertain export growth to drive the economy. 
  • By cutting wages and costs at home (internal devaluation), Portugal has in recent years improved its level of competitiveness in the eurozone relative to Germany. However, this trend actually started to reverse sharply in 2012, meaning that the divergence between countries such as Portugal and Germany has begun growing again – exactly the sort of imbalance the eurozone is seeking to close. 
  • In its austerity efforts, Portugal is now coming up against serious political and constitutional limits. For the second time, the country’s constitutional court has ruled against public sector wage cuts – a key plank in the country’s EU-mandated austerity plan – while the previous political consensus in the parliament for austerity has evaporated.
  • In combination, it will be increasingly difficult for Portugal to sell austerity at home and consequently to negotiate its bailout terms with creditor countries abroad.
  • Portugal may well need some further financial assistance before long. It is unlikely to take the form of a full second bailout, but could involve use of the ECB’s OMT bond-buying programme, assuming Portugal can return to the markets fully beforehand (even briefly). 
  • Slovenia is not Cyprus – in fact it is much more like Spain. Its banks are significantly undercapitalised with toxic loans now standing at 18% of GDP. Banks only have provisions to cover less than half the potential losses resulting from these loans.
  • At the same time, a heavily indebted private sector is now desperately trying to get debt off its books, which alongside continued austerity and lack of investment, have caused growth to plummet.
  • Though a full bailout is unlikely, the country could soon need an EU rescue package worth between €1 billion and €4 billion (between 3% and 11% of GDP) to help restructure the country’s bust and mismanaged banks.
  • Such a plan is likely to include losses for shareholder (bail-ins) but, unlike in Cyprus, it may not hit large (uninsured) depositors and there will be no attempt whatsoever at taxing smaller (insured) depositors.
To read the full briefing, click here.


Anonymous said...

Putting economics aside, when oh when will countries/nation states decide that they do not wish to effectively, protectorates of Germany.
Do they not realise the loss of national sovereignty they have given up to be part of the euro nightmare?

Rik said...

1. Portugal. But it is not only labourcosts it is also other costs.
And looking at those (seen the fact that there is still inflation, like in all other PIIGS), difficult to see how they will catch up.
Assuming productivity is a good measure for that part prices that remain high for other things have to be compensated by even lower labourcosts.
Problem is as well imho that Portugal tries to increase export with 'Chinese-sort' products. Competition internationally has increased enormously.
really good candidate.
2. Slovenia is a bit difficult to understand. Like Spain before they are running to the cliff. Looking at the max amount involved and from where they came with low or no deficits. One would have expected a reorganisation much earlier. Clean up the joint which is most likely necessary to start again. Money could come from a bail in of some sort.
But it simply looks that the political will is missing. So now it is waiting that things get so bad markets dump it and the EZ has to step in and they will get even worse conditions.
3. Cyprus is completely missing the plot. The strategy is get the first package in house and subsequently come for a next one. And not come for 2.0 when 1.0 is not yet approved.

Europe closes down July and August so Portugal and Slovenia are likely to start to play short after that. Will be be before or after the German elections?

Rollo said...