Europe faces second revolt as Portugal's ascendant Socialists spurn austerity

Germany is worried that any concession to Greece will set off political contagion and cause fiscal discipline to collapse across southern Europe

By Ambrose Evans-Pritchard

6:00PM BST 19 May 2015

A protester holds a flare during a demonstration in Lisbon on November 14, 2012 during a general strike

A protester holds a flare during a demonstration in Lisbon during a general strike in 2012 
Europe faces the risk of a second revolt by Left-wing forces in the South after Portugal’s Socialist Party vowed to defy austerity demands from the country’s creditors and block any further sackings of public officials.

"We will carry out a reverse policy,” said Antonio Costa, the Socialist leader.
Mr Costa said a clear majority of his party wants to halt the “obsession with austerity”.

Speaking to journalists in Lisbon as his country prepares for elections - expected in October - he insisted that Portugal must start rebuilding key parts of the public sector following the drastic cuts under the previous EU-IMF Troika regime.
The Socialists hold a narrow lead over the ruling conservative coalition in the opinion polls and may team up with far-Left parties, possibly even with the old Communist Party.
“There must be an alternative that allows us to turn the page on austerity, revive the economy, create jobs, and – while complying with euro area rules – restore hope to this county,” he said.

While the Socialist Party insists that it is a different animal from the radical Syriza movement in Greece, there is a striking similarity in some of the pre-electoral language and proposals.

Syriza also pledged to stick to EMU rules, while at the same time campaigning for policies that were bound to provoke a head-on collision with creditors.

Portugal's total debt ratio is the highest in Europe
Portugal's total debt ratio is the highest in Europe

Mr Costa accused the Portuguese government of launching a blitz of privatisations in its dying days, signalling that the Socialists will either block or review the sale of the national airline TAP, as well as public transport hubs and water works.

His harshest language was reserved for the International Monetary Fund but this reflects the cultural milieu of the Portuguese Left. In reality the IMF was the junior partner in the Troika missions.
Mr Costa unveiled a package of 55 measures in March, led by a wave of spending on healthcare and education that amounts to a fiscal reflation package. The party would also roll back labour reforms and make it harder for companies to sack workers.

The plan would appear entirely incompatible with the EU’s Fiscal Compact, which requires Portugal to run massive primary surpluses to cut its public debt from 130pc to 60pc of GDP over 20 years under pain of sanctions.

The increasingly fierce attacks on austerity in Lisbon are likely to heighten fears in Berlin that fiscal and reform discipline will break down altogether in southern Europe if Greece’s rebels win concessions. Worry about political "moral hazard" is vastly complicating the search for a solution in Greece.

“Greece is the testing ground and everybody is watching very carefully. That is why the Spanish and Portuguese prime ministers have been so hawkish,” said Vincenzo Scarpetta, from Open Europe.

No deal for Greece is yet in sight. Syriza continues to live from hand to mouth, narrowly putting off default week after week by raiding obscure funds. The country’s finance minster, Yanis Varoufakis, told Greek television on Monday night that “pensions and salaries are sacred” and will take priority if the money runs out. “I would prefer to default to the IMF rather than on salaries,” he said.

Sending out mixed messages, he also said that Greece had no plans for a rupture with Brussels or a “change of currency”.

Portugal is no longer under Troika control. It exited its €78bn bailout programme last year and returned to the markets. It is currently able to borrow money for 10 years at an interest rate of 2.35pc. “We no longer have any direct leverage,” said one EU official.

However, countries remain under “post-programme surveillance”, with two monitoring missions on the ground each year until they have repaid 75pc of the money. Portugal will not be in the clear for a long time.
The legal text stated that the council of EMU ministers can issue “recommendations for corrective actions if necessary and where appropriate”. The EU bail-out funds (ESM and EFSF) have their own “early warning mechanism” to ensure that debtors stay on the right track.

Portugal has weathered the austerity crisis in much better shape than Greece but it remains vulnerable, with higher aggregate debt levels and far lower levels of education than Greece.

Total combined public and private debt is more than 370pc of GDP, the highest in Europe. This leaves the country badly exposed to the effects of debt-deflation and stagnant nominal GDP.

William Buiter, Citigroup’s chief economist, said Portugal has many of the same economic "pathologies" as Greece, and is likely to be first in line for contagion if the sanctity of monetary union is violated by the ejection of Greece.

Citigroup calculates that Portugal’s debt ratios have already gone beyond the point of no return, warning that the country will ultimately need some form of debt-restructuring to wipe the slate clean. This lingering fear in the market leaves Portugal prone to a fresh debt crisis if the eurozone recovery runs out of steam.

The IMF said in its Article IV healthcheck this week that Portugal’s bailout has been a success but warned that the "country remains highly vulnerable".

The “export miracle” is narrowly based and does not yet reflect lasting gains in competitiveness. “A durable rebalancing of the economy has not taken place and the nontradable sector is still dominant,” it said.

While exports have jumped from 30pc to 40pc of GDP since 2010, the picture is far less rosy for "domestic-value added exports", the metric used by the IMF to measure meaningful gains.

The Fund said Portugal is currently benefitting from a “trifecta of record-low interest rates, a weakening euro, and low oil prices” but this cyclical tailwind will fade over time.

“Portugal faces an acute growth challenge. Productivity growth has been declining over the past half-century. Looking forward, Portugal’s working-age population is projected to fall, and the country’s capital stock is contracting because of under-investment,” it said.

This stagnation trap makes it extremely hard for the country to grow its way out of debt, or to overcome external liabilities of 215pc of GDP. “A systemic solution to the problem of excessive leverage is needed. Not only do the banks that keep too much bad credit on their books endanger financial stability, they are also unable to finance the economic recovery,” it said.

The Poverty Preening of Professor Obama

The president once again suggests the moral inferiority of those who disagree with him.

By William McGurn 

May 18, 2015 7:06 p.m. ET

President Obama at a panel discussion on overcoming poverty at Georgetown University, in     Washington, D.C., on Tuesday. Photo: EPA/AUDE GUERRUCCI / POOL

So this is what the president means by having a “conversation.”

At a Georgetown University conference last week, President Obama appeared on a panel billed as a “conversation” on poverty. It proved illuminating, though not in the way its sponsors intended.

Begin with the panel itself. A solitary conservative, the American Enterprise Institute’s Arthur Brooks, was pitted against two liberals, President Obama and Harvard social scientist Robert Putnam.

The panel was moderated by the Washington Post’s E.J. Dionne.

To put it another way, what we had here was a “conversation” stacked in favor of liberals, moderated by a liberal, and taking place before a liberal crowd at a liberal university.

As if to underscore the point, the president and the moderator squeezed off three boorish references to House Speaker John Boehner and Senate Majority Leader Mitch McConnell—all rooted in the idea that it would take a “miracle” to get GOP leaders to care about the por.

In its news report, the New York Times NYT 0.50 % parroted the party line about a conversation: “Obama Urges Liberals and Conservatives to Unite on Poverty.” Politico captured it more honestly: “Obama calls out financiers, conservatives and churches on poverty.”

Nor were these the only ones called out. While paying lip service to the notion that those who disagree with him might in fact have hearts, Mr. Obama—rather than engage with Mr. Brooks—used the occasion to review his enemies list. It included the Republican Congress (their budgets prove they don’t care), hedge-fund managers (they take money that belongs to kindergarten teachers), the churches (they’re not committed to helping the poor because they worry too much about abortion and marriage), Fox News (it vilifies the poor) and, for good measure, parents who send their children to private schools (they are withdrawing from the “commons”).

The unifying progressive contention here is the assertion that America isn’t “investing” enough in the poor—by which is meant the government isn’t spending enough. Though President Obama did acknowledge the importance of family by defending his past criticisms of absent fathers, he went on to declare it will be next to impossible to find “common ground” on poverty until his critics accept his spending argument.

Likewise for Mr. Putnam. Though his research underscores the devastating consequences of broken families, he too focused mostly on too little government spending.

Now, leave aside the argument of whether poverty owes more to a lack of government spending or to family structure and other social breakdowns. Truth is, it’s simply false to say that Republicans won’t make the public “investments” needed to help the poor.

In New York in the 1990s, for example, Republican Mayor Rudy Giuliani not only invested in the police but sent them into the areas where they were most needed—primarily poor and minority neighborhoods. In too many other Democratic cities, by contrast, mayors in effect cede whole neighborhoods to the thugs and gangs.

Republicans are also willing to spend on education. What they are not willing to do is dump ever more dollars down the same rathole of big-city public school systems that function more as jobs programs for city bureaucrats and members of the teachers unions.

While we’re on the subject, note that it is the president who has tried to kill the Opportunity Scholarship program that gives poor parents in the District of Columbia the opportunity to send their children to schools such as the one where he and Michelle Obama send their own kids, the exclusive private school Sidwell Friends. Meanwhile, it is Republican John Boehner who has kept the program and public funding in place for those children who need it.

Mr. Brooks gamely tried to push back on the progressive pieties, arguing that antipoverty programs need to get past treating the poor as liabilities to be managed and start looking at poor men and women as untapped human capital. He further noted how it is the poor who suffer most when we measure programs by intentions rather than results. It would have been instructive to hear the president and Mr. Putnam explain if there is any metric they might embrace in place of what seems to be the one-size-fits-all liberal answer to any failed government anti-poverty program: increase spending.

On the flip side, it would similarly be good for Republicans to address the hard implications of their own message. If, for example, broken families are indeed driving modern American poverty, is the only answer despair—or praying for some miracle? And if you believe the government can’t help but bungle something as basic as food stamps, shouldn’t you bring this same skepticism to a “conservative” program that enlists the government to, say, discourage divorce or promote chastity?

Of course, this would require a genuine conversation, not a stacked stage for the president to once again parade his moral superiority as the answer to his critics.


The Chinese chequebook

Latin America needs to be more hard-headed with its big new partner

May 23rd 2015 .        

DUBBED “Mad Maria”, the Madeira-Mamoré railway was said, with only some exaggeration, to have cost a life for every sleeper laid. Built for booming rubber exports, the 367km (228-mile) line from Porto Velho in the heart of the Brazilian Amazon to the Bolivian border was rendered obsolete by new Asian plantations almost before it opened in 1912.

A century later a plan for a much longer railway across the Amazon, from Brazil’s Atlantic coast to Peru, is among a sheaf of infrastructure projects that China is offering to finance in Latin America. Li Keqiang, China’s prime minister, signed an agreement for a feasibility study for the railway during an eight-day trip through South America that began on May 18th in Brazil and will take him to Colombia, Peru and Chile.

Mr Li came armed with proposed investments and loans that could total up to $103 billion in Brazil alone. His destinations and the projects both point to a maturing of China’s relationship with Latin America. This saw explosive growth in trade, as China gobbled up Latin America’s minerals, oil and soyabeans while exporting its manufactures.

Now economies are slowing on both sides of the Pacific. China’s slowdown has prompted a steep fall in commodity prices, and thus the value of Latin America’s exports. Brazil’s exports to China slumped by a third in the first quarter of this year compared with the same period in 2014.

But Chinese investment and loans are set to carry on growing. In January President Xi Jinping said that Chinese companies would aim to invest $250 billion in Latin America over the next ten years, compared with a previous total stock of $99 billion. While early Chinese investment was almost wholly in oil, gas and mining, it is broadening out to involve more companies and industries, including food and agriculture, manufacturing and, above all, infrastructure.

The same goes for Chinese loans. The $22 billion lent last year outstripped credits from traditional multilateral development banks, according to China-Latin America Economic Bulletin, published by Boston University. Apart from Brazil, the money has mainly gone to Venezuela, Ecuador and Argentina, where it has helped to sustain left-wing governments. Mr Li’s trip suggests a new interest in the business-minded countries of the Pacific Alliance.

Many governments in Latin America have embraced the Chinese dragon as a welcome alternative to the United States and the conditions imposed by the IMF and the World Bank.

For a region with huge shortcomings in infrastructure, China’s investment, like its trade, is potentially a boon. But both have pitfalls.

An obvious one is sweetheart deals. Last year Cristina Fernández de Kirchner, Argentina’s president, negotiated a currency swap with China, as an alternative to settling her dispute with foreign bondholders. The price is high: the money is tied to 15 infrastructure deals in which Chinese firms face no competition.

More broadly, China has served to reinforce Latin America’s specialisation in commodities.

That may not be the route to sustained growth. In a report published this week, the World Bank finds that increases in Latin America’s trade with and investment from countries of the “South” (ie, the emerging world) were associated with a smaller boost to growth and productivity than equivalents from the “North” (ie, the developed world).

China’s interest in developing Latin America’s infrastructure is not altruistic. It wants to lower the transport costs of its imports, such as soya from Mato Grosso state. Its railway and other infrastructure companies have spare capacity because consumption is replacing investment as the main source of Chinese growth.

Because of the concentration in commodities, Chinese trade and investment in Latin America have been “a major driver of environmental degradation”, according to the team at Boston University. The transcontinental railway is a new concern. Peruvian officials favour a northern route through virgin forests rich in biodiversity. Environmentalists prefer a southern route, to Matarani, beside a new road linking Brazil to Peru opened in 2012. But as with Mad Maria, traffic along this highway has been lower than forecast.

It would be wrong to blame China for these risks. Most of its companies in the region have a reasonable record of complying with environmental standards. Rather, it is up to Latin America to become as effective as its new partner in defending its interests in the relationship.

Those interests include protecting the environment and avoiding one-sided deals struck for short-term political convenience.

sábado, mayo 23, 2015



History Shows A Gold Bull Market Is Fast Approaching

By: Jeff Clark

Tue, May 19, 2015

Yearning for sunnier skies for your gold investments? How's this sound.
  • Gold in a decisive bull market, with the price steadily rising
  • Silver soaring and outpacing gold's gains
  • Gold stocks rocking, erasing underwater positions and racking up the profits
That's not pie in the sky wishful thinking-it accurately describes the next stage of the gold market, something that will soon visit your portfolio.

With the price of gold currently stuck in place, like a stain on the front of your best shirt, and the stocks only teasing us like Lucy holding the football for Charlie Brown, how can I be so sure?

Because that's exactly what happened after every other bear market. For example.
  • 1976. Bear market ends, and gold begins a 701% run in less than four years.
  • 1985. Bear cycle ends, bull cycle begins. Gold gains 71.8% over the next three years.
  • 2001. Monster gold bull cycle delivers a 630% advance over the following 10 years.
As I pointed out last month, markets cycle. The current range-bound price for precious metals won't last forever, for the simple reason that they never have, especially in the resource market.

If you set your sights on the big picture, you'll see that in spite of today's negative emotions, gold's future prospects will render them a distant memory.

Consider some of the likely changes on the horizon and how they will transform the gold market from flat and listless to exciting and profitable.
  • Stock market reversal. The performance of the broader equity markets is probably the biggest reason gold hasn't attracted the mainstream. But stock markets cycle, too, and a correction is due, perhaps overdue-the S&P is up six straight years and nine consecutive quarters. Margin debt is higher now than it was preceding the 2008 crisis, and corporate profits saw the biggest drop in four years last quarter. Gold will be the benefactor in the reversal, especially since it's already corrected.

  • Recession. The probability of a future recession is 100%. The only question is when and how big. GDP last quarter was barely positive. Any unexpected surprises to the downside for the economy will be especially positive for gold.

  • Currency war backfire. This "race to the bottom" being pursued by global central bankers won't work long term. At best, countries steal growth from their trading partners. At worst, it can disintegrate into inflation, recession, retaliation, and even war. Currency wars have happened before-twice in the last century alone-and they've always ended badly. One guess what asset performs well in a crisis.

  • Higher interest rates. We're skeptical that the Fed will actually raise rates, but eventually the market will force rates higher regardless of the Fed. This, in turn, will hurt the real estate market. Meanwhile, those analysts that blindly assume rising rates are negative for gold forget that real rates (nominal interest rate minus inflation) are positive for gold-an almost certain outcome because of.

  • Inflation. The emergence of inflation feels far off, but already there are signs it's picking up. Wages have started to move higher, what is normally the starting point for inflation. Ground beef prices are now at record highs and have more than doubled since 2010-increases like this can't go unaccounted for indefinitely. Remember, we don't have to wait for high inflation for gold to move; it's the onset of inflation, or an unexpected jump in inflation, that will spur gold.

  • US dollar reversal. If you've grown tired of the dollar's "strength," don't leave the theatre early. Its rise is certainly not sustainable long term, and in time will be forgotten. Nothing stays standard deviations above the norm forever. And eventually the dollar will collapse, because the trajectory of our debt isn't mathematically sustainable.

  • Bond market turmoil. As my colleague Dan Steinhart pointed out in The Casey Report, there are currently $3.6 trillion in negative-yield government bonds outstanding today, mostly in Europe and Japan, giving investors zero chance of making money or even breaking even. The sad outcome here is that inflation will massacre the average bond holder.
My point is that any reasonable big picture view of the political, financial, and economic trends show that virtually all of those changes will be very positive for gold-and aren't that far off.

It will be a new day for the gold market, one full of rising prices and profitable investment statements.

But despite all this evidence, there are those in our industry still calling for gold to fall.

No Pain, No Gain for Britain?
Robert Skidelsky
MAY 19, 2015

British Chancellor of the Exchequer George Osborne
LONDON – The economic historian Niall Ferguson reminds me of the late Oxford historian A.J.P. Taylor. Though Taylor maintained that he tried to tell the truth in his historical writing, he was quite ready to spin the facts for a good cause. Ferguson, too, is a wonderful historian – but totally unscrupulous when he shifts into political gear.
Ferguson’s cause is American neo-conservatism, coupled with a relentless aversion to Keynes and Keynesians. His latest defense of fiscal austerity came immediately after the United Kingdom’s recent election, when he wrote in the Financial Times that, “Labour should blame Keynes for their defeat.”
Ferguson’s argument amounts to that of a brutal disciplinarian who claims vindication for his methods by pointing out that the victim is still alive. In pleading on behalf of British Chancellor of the Exchequer George Osborne, he points out that the UK economy grew by 2.6% last year (the “best performing of the G-7 economies”), but ignores the damage that Osborne inflicted on the economy en route to this recovery.
There is now much agreement about this damage. The Office of Budget Responsibility, the independent agency set up by Osborne to assess the government’s macroeconomic performance, has just concluded that austerity reduced GDP growth by 2% from 2010 to 2012, bringing the cumulative cost of austerity since 2010 to 5% of GDP. Simon Wren-Lewis of Oxford University estimates that the damage might be as high as 15% of GDP. In a recent poll of British economists by the Centre for Macroeconomics, two-thirds agreed that austerity had harmed the UK economy.
Moreover, Britain is not alone. In its October 2012 World Economic Outlook, the IMF admitted that, “fiscal multipliers were underestimated across the world.” In plain English: the forecasters underestimated the extent of spare capacity and hence the scope for fiscal expansion to raise output.
Was it an honest mistake? Or was it because the forecasters were in thrall to economic models that implied that economies were at full employment, in which case the only result of fiscal expansion would be inflation? They now know better, and Ferguson should now know better as well.
A depressing aspect of Ferguson’s unscrupulousness is his failure to acknowledge the impact of the Great Recession on government performance and business expectations. Thus, he compares 2.6% growth in 2014 with the 4.3% contraction in 2009, which he describes as “the last full year of Labour government” – as though Labour policy produced the collapse in growth.

Similarly, “At no point after May 2010 did [confidence] sink back to where it had been throughout the last two years of Gordon Brown’s catastrophic premiership” – as though the Brown government’s performance caused business confidence to collapse.
The claim that “Keynes is to blame” for Labour’s election defeat is peculiarly odd. After all, the one thing Labour’s leadership tried hardest to do in the campaign was to distance the party from any “taint” of Keynesianism. Perhaps Ferguson meant that it was Labour’s past association with Keynes that had damned them – “their disastrous stewardship before and during the financial crisis,” as he puts it.
In fact, Labour’s most recent governments were determinedly non-Keynesian; monetary policy was geared to hitting a 2% inflation target, and fiscal policy aimed at balancing the budget over the business cycle: standard macro-economic fare before the recession struck. The most damning charge against their stewardship is that they embraced the idea that financial markets are optimally self-regulating – a view that Keynes rejected.
Keynes was not to blame for Labour’s defeat; in large part, Scotland was. The Scottish National Party’s crushing victory left Labour with only one seat in the country. There are no doubt many reasons for the SNP’s overwhelming triumph, but support for austerity is not one of them. (The Conservatives did as badly as Labour.)
Nicola Sturgeon, First Minister of Scotland and leader of the SNP, attacked the “cozy consensus” around fiscal consolidation in Westminster. The deficit, she rightly said, was “a symptom of economic difficulties, not just the cause of them.” The SNP manifesto promised “at least an additional £140 billion ($220 billion) across the UK to invest in skills and infrastructure.”
So if the SNP did so well with a “Keynesian” program of fiscal expansion, is it not arguable that Labour would have done better had it mounted a more vigorous defense of its own record in office and a more aggressive attack on Osborne’s austerity policy? This is what leaders of the Labour party like Alistair Darling, Gordon Brown’s Chancellor of the Exchequer, are now saying. But they seem to have had no influence on the two architects of Labour’s election strategy, Ed Miliband and Ed Balls, both now removed from front-line politics.
What the Conservatives did succeed in doing, and doing brilliantly, was to persuade English people that they were only “cleaning up Labour’s mess,” and that, but for austerity, Britain would have “gone the way of Greece” – exactly Ferguson’s view.
One might conclude that all of this is history: the voters have spoken. But it would be a mistake to accept the Conservative narrative as the last word. It is basically a tissue of propaganda, with little support in theory and destructive effects in practice.
This might not matter so much had there been a change of government. But Osborne is back as Chancellor, promising even tougher cuts over the next five years. And fiscal austerity is still the reigning doctrine in the eurozone, thanks to Germany. So the damage is set to continue. In the absence of a compelling counter-narrative, we may be fated to find out just how much pain the victims can withstand.