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| 2011 | |
| March | |
| Thu Mar 24 22:46:19 2011 Bankrupt Portugal |
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| Thu Mar 24 22:46:19 2011 Bankrupt Portugal Another EU domino falls? |
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| With the
tsunami in Japan, and
continued unrest in the Mideast, it was easy to miss today's headlines that
Portugal's prime minister resigned and
the country needed an EU bailout to avoid default.
Furthermore, not only is Portugal very likely to need a bailout, it increased speculation that Spain may be next. Why did Portugal's prime minister resign? Because all the opposition parties and most of Portugal's organized labor opposed his austerity measures to get the budget under control. Rather than accept the required spending cuts and tax raises to fix the country's fiscal problems, there were strong protests to raise government wages instead. Obviously, that would just make the problem worse, however much the wage increases may be desired or even deserved. This followed a familiar pattern:
Now we see the same pattern in Portugal, and I and others believe Spain will be next. I'll make a prediction that Spain will ask for an EU bailout before the end of 2011. One option may be to let Portugal default! Countries have defaulted before ( Sovereign Bankruptcies). Portugal isn't a complete basket case, and defaulting would still put them in a position where they'd have to enact severe austerity measures, but they could rebuild on their own. A default may not be much worse than an EU bailout anyway, and may be healthy to remind investors that giving your money to governments is not a safe bet. This would raise the borrowing costs for all countries, which would also be a good thing. And it would be a strong message to Spain that it needs to get its own house in order, and not also rely on an EU bailout. But I don't think that will happen. Portugal and Spain will ask for, and receive, EU bailouts instead. Before we in the US start pointing fingers, remember that our own budget is pretty hosed as well. In fact, just yesterday it was noted that our federal disability funds are about to run out because they are being abused by many states. And even without people abusing disability benefits, scheduled spending means Medicare and Social Security will start to hit insolvency in 2017. In fact, Medicare is already running a deficit and is burning through the taxes of previous years. And like everyone facing crises in European countries, even though the mathematics make it obvious that we have to reduce Medicare and Social Security spending, many people don't want their benefits to go down. (However, the latest bipartisan efforts to address the problem are a very encouraging step.) The main learnings? First, deficit spending does eventually catch up to you. And second, if a country lets things get out of control, most people won't want to fix it, because it will mean they'll have less money during the austerity period. That means fixes get postponed until they are too late, and the recovery (if it happens) is much more severe. The main thing is to vote for representatives that will get the budget under control. Representatives are terrified of touching Medicare or Social Security because they think we'll vote them out. We have to let our reps know that we'll support responsible budget planning, even if it means reduced benefits, to avoid bankruptcy. Comments |
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