What Comes After the Bailout of Portugal

By: Inoljt, http://mypolitikal.com/

Sometimes reviewing past news events can yield unexpected irony. Here, for instance, is the New York Times’ page on Portugal News. The second-to-last article, dated on January 12th is titled, Portugal Says It Needs No Bailout and Won’t Seek One. After that there is a series of optimistic articles titled, respectively, Portugal’s Bond Sale Better Than Expected, Bond Sale A Success In Portugal, Optimistic Outlook Eases Portugal’s Borrowing Costs.

Two days ago, however, came this gem: Portugal to Ask Europe For Bailout.

This bailout comes after the previous bailouts of Greece and then Ireland. The European Union has detailed a bail-out fund of approximately one trillion dollars, which can be lent to countries at lower than at-market interest rates. Originally this was meant to stop the market panic over the European sovereign debt crisis. To some extent it has succeeded in alleviating the panic.

On the other hand, it has obviously failed to contain the contagion to Greece alone.

By itself Portugal is not too big of a problem for the fund. Its economy is smaller than Greece’s; so is its population. The fund will be able to deal with Portugal, as it did with Greece and Ireland.

The question is, however, what comes next. With the bailout of Portugal, all eyes are looking towards Spain. This is the market’s next target.

A bailout of Spain would be a magnitude more difficult than the previous bailouts. Its economy is far bigger; more than a trillion dollars in GDP. This is four to five times bigger than Greece. It has a population of 46 million, several times that of Greece.

It would be very difficult and extremely expensive to rescue Spain’s 1.4 trillion dollar economy, unlike the relatively cheap rescues so far enacted. The bailout might perhaps or probably be impossible.

In other words, the eurozone has almost reached the end of its line. In the summer of 2010, during the height of the Greek crisis, analysts worried not about Greece but about Spain (and Italy after Spain). Spain was the big fish, the debt-ridden country in a recession big enough to pull down the euro. The fear was that Greek bankruptcy would set off a chain reaction, moving from Greece to Ireland to Portugal and finally to Spain.

Well, Greece, Ireland, and Portugal have asked for a rescue, and it has come down to Spain. Spain must not fall.

 

 

An Unmentioned Cause Behind America’s Economic Woes

America’s economy is in a bad way. The economic recovery has turned out to be disturbingly weak, and joblessness rates are still actually rising. Investment is down, Americans are depressed and angry, and there are even worries about a double-dip recession.

There has not been much analysis of the causes behind today’s economic stagnation. Most experts talk about how weak recoveries generally follow financial crises. Politically, Republicans blame Democrats, and Democrats are generally too busy trying to fix the problem than to think about what caused it.

Yet there is indeed something that did badly damage the recovery – an event very few nowadays link to America’s economic woes. This event was much like the 2008 financial crisis (indeed, it actually was another financial crisis). It dominated newspaper headlines, threatened to severely weaken several economically mighty countries, and in the end required international intervention to the tune of one trillion dollars.

On the surface, the European sovereign debt crisis – and more specifically, the bankruptcy of Greece – might have little to do with the United States. Greece, after all, is quite far away from America. Yet, as 2008 showed, the fall-out from a financial crisis goes wide and far; if Europe was hurt by America’s financial crisis, it stands to reason that America was hurt by Europe’s financial crisis.

Moreover, both crises had much in common. Panic hit the market and risk spread wildly, from the original contagion to even the safest strongholds. In the United States, banks went bankrupt; in Europe, countries went bankrupt. For both crises, the “fix” cost hundreds of billions of dollars.

There is another, more ominous analogy. The Great Depression, it is commonly held, started with the collapse of the American stock market. What really made it “Great,” however, was a series of bank failures that followed. These started in Austria. If the 2008 financial crisis was Black Tuesday, then the Greek crisis holds a disturbing parallel with the chain of bank failures that started in Europe.

Fortunately, the European Union was able to put a halt to the Greek crisis – unlike what happened during the Great Depression. Due to the lessons learned from that era, unemployment is less than half what it was during the Great Depression’s peak (which is, unfortunately, still quite high).

Nevertheless, the fact that the European debt crisis was halted probably did not it from inflicting the harm it had already done. Much as the 2008 financial crisis raised unemployment to jump to 10%, fall-out from the European financial crisis seems to be keeping it at that number. It is interesting that almost nobody, whether in politics or economics, seems to be publicizing this fact.

--Inoljt, http://mypolitikal.com/

 

 

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