Lisbon EXPRESSO Interviews EW Chief Political Economist Dr David Caploe on Portuguese, Euro-Zone Debt Crises
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29 April 2010 By David Caploe PhD, Chief Political Economist, EconomyWatch.com.
29 April 2010 By David Caploe PhD, Chief Political Economist, EconomyWatch.com.
29 April 2010 By David Caploe PhD, Chief Political Economist, EconomyWatch.com.
29 April 2010 By David Caploe PhD, Chief Political Economist, EconomyWatch.com.
and with the downgrading of the sovereign debt of Portugal earlier in the week by Standard and Poors, has now reached that country of superb food and beautiful Atlantic beaches —
and has asked our Chief Political Economist, Dr David Caploe, to examine both the Portuguese and larger Euro-zone crisis from his unique perspective.
With the agreement of our friend and colleague, Jorge Nascimento Rodrigues, we now present an unedited and complete version of that interview in English: [br]
1) Is Portugal, in your opinion, in a situation similar to Greece or are the markets overreacting and speculating against portuguese sovereign debt?
Well, there are obviously some sovereign debt similarities —
altho we certainly don’t know the extent to which, or even if, firms like Goldman Sachs were involved in the Portuguese situation, as they clearly were with Greece.
And that definitely makes a difference from a general stability point of view.
That said, as I believe we’ve discussed, the debt / GDP ratios of the two countries are also different, altho Portugal’s is, unfortunately, trending in a negative direction.
Still, Greece’s is well above 100% and Portugal’s well under,
so while I agree there’s a disturbing trend in Portugal’s sovereign debt situation, I don’t think the situations are structurally analogous at all.
As for the market‘s reactions, well, we just ran an excellent piece from a German analyst who pointed out quite clearly how market speculators thrive on political ambiguity,
of which Germany’s Angela Merkl has, unfortunately, contributed an outsize portion to the Greek situation.
Here’s what he had to say:
It is remarkable that, after all that has happened in the last couple of years, experienced politicians still assume that financial markets produce rational and reliable information
It is a fact that speculators have access to no more information about Greece than the economic experts in Europe’s governments.
There are, however, many market players such as hedge funds which derive profits from uncertain events.
The more chaotic things are, the more they like it.
Their biggest enemy is political clarity, which is why they are delighted when politicians indulge in scaremongering.
In the case of Greece, this scaremongering has succeeded extremely well, as the skyrocketing risk premiums show.
The role of rating agencies can also not be forgotten.
It was their downgrading of Greece’s creditworthiness that triggered waves of speculation.
This is partly because the rating agencies, according to current regulations and despite their total failure during the financial crisis, still have a lot of power over the markets — power that was given to them by politicians
which I think is a VERY astute and short analysis of the real forces at play in defining how we see all these sorts of situations. [br]
2) What can or should Portuguese government do to invert this pressure in the markets?
Well, far be it from me to tell the Portuguese government how to handle a VERY tricky and dynamic situation — there are NO easy or clear answers.
What I would suggest is that they PUBLICLY request the ECB / IMF / and other Euro-zone institutions to put a hold on obvious speculator / hedge fund plays on Portuguese debt for the next two weeks —
similar to what the Greek government has done in banning “short”s for the next two weeks —
until there can be a little more order and predictability in the entire situation.
Beyond that, I don’t think there’s much they CAN do except wait for the otherwise seemingly inevitable onslaught of the speculators.
In that context, though, they might, again PUBLICLY, request the rating agencies like S & P to make clear and open the criteria they are using to make their ratings —
especially when they are compared to other, more advanced countries — if, indeed, there are any 😉 —
whose statistical profile is similar to Portugal, but whose rating they have NOT downgraded.
Indeed, I think it’s high time a little focus is put on the rating agencies themselves, whose record is anything BUT blameless in this on-going disaster, as we have done in the past few days at Economy Watch.
3) Do you think that is really possible to have a true default in one or several of the eurozone countries, a kind of serial default wave?
Well, mi amigo, I certainly it’s POSSIBLE to have BOTH a “true default” AND a serial default within the Euro-zone.
As we have continually pointed, there is a structural problem in the Euro-zone, which could be papered over as long as the global and European economies were doing well, but which became painfully evident in the aftermath of Black September 2008,
So, unfortunately, BOTH of these are real possibilities, ESPECIALLY as long as the political leadership of the Euro-zone as a whole,
and the major individual countries — above all, of course, Germany — remain unable / unwilling / unclear about how to make sure such defaults DON’T occur.
4) Should other members help Greece or force it to default and opt out?
Well, again, that’s a tricky question for an outsider to answer — not just an outsider to any particular country, but, as an American, to Europe in general 😉 .
That said, I can’t see ANY scenario in which forcing Greece out of the Euro-zone does ANYTHING but heighten the crisis, and make it worse for everyone —
most particularly, the “next” such countries, namely Portugal, Spain, and — hold you breath — Italy, which was one of the original EEC 6 back in 1959.
The default of Greece, and its expulsion from the Euro-zone — again, especially in the crass and chaotic way in which it would have to be done … IF it were to be done — would really throw the entire project into question.
And while there are certainly problems with keeping the Euro-zone together — above all, bringing the fiscal, ie, government spending, policies of ALL the countries into line, just as has occurred at the monetary level —
dealing with those problems are INFINITELY preferable to letting the Eurozone collapse a) at all, and b) in such an undignified and uncontrolled fashion.
There are also just too many real economic links among the Euro-zone countries to make such a de-linkage even thinkable, so, as Paul Krugman correctly said when this crisis first emerged, there really is no way to go but forward.
5) Is this current turmoil in eurozone debt markets a sign of failure or, at least, symptom of the fragility of European and Monetary Union?
Certainly the fragility, as we have noted, and of a structural problem within the Euro-zone,
namely, as above, the conflict between a single monetary policy formulated by the European Central Bank,
and fiscal, or government spending, policy, which remains in the hands of the 16 member countries,
and which, to be sure, they are going to be VERY reluctant to cede to ANY sort of “supreme” power.
Now this is NOT a problem that can any longer papered over, as it was until Black September 2008,
and there are neither immediately visible, let alone easy, solutions to this problem.
Nevertheless, as we have noted, Europe as a whole — not just the Euro-zone — HAS become deeply unified by real economic links that ARE working, and which DO contribute to a genuine European solidarity.
So while I think this DOES represent a structural crisis within the Euro-zone, I ALSO think there are counter-vailing forces to keep the zone together,
and I think the test of real leadership — which, to be honest, has been sadly lacking in the current generation of European and, to be equally honest, American, political leaders as well —
is whether they can find a way to BUILD on this genuine REAL ECONOMIC inter-connection to solve this problem between fiscal and monetary policy.
It certainly won’t be easy, but it CAN be done — IF the leaders involved act like such, and have the VISION to use the existing base to solve admittedly difficult problems.
6) Is it necessary to create an institutional framework, like an European Monetary Fund, for instance, to cope with this kind of problems?
Yes, I think it probably is necessary, and I don’t think it’s a bad thing for such a body to be created, especially as part of a transition from a situation of 16 fiscal policies vs. 1 monetary policy to whatever else may take shape.
The IMF has plenty on its plate already, and, while it does seem a necessary part of an immediate solution to the Greek situation, I think neither it nor Europeans really WILL be comfortable with it being a permanent feature of the European political economic scene.
So I think that an EMF is a very good idea, one whose creation could engage European creativity of the sort that oversaw the creation of the European Coal and Steel Community in the mid-50s, and then the European Economic Community, and return to the convertibility of European currencies, at the end of 1958.
Obviously, the “deals” that will have to be made will be a bit more complex than those — which basically secured French markets for German industrial goods, and German markets for French agricultural goods —
but I don’t think it should be beyond the capacity of Europeans to create such a body to help ease the inevitable strains of transition from 16 fiscal policies to somewhat fewer, even if not yet a single, unified, fiscal policy.
David Caploe PhD
Chief Political Economist
EconomyWatch.com
President / acalaha.com
