“at 6.72 percent the cost of borrowing remains high, and
with bonds being traded at nearly 7 percent in the secondary
market there is little sign investors are convinced Portugal can
avoid following Greece and Ireland and asking for a bailout.” — Nia Williams and William James, Reuters (1)
Portugal faces a struggle to persuade investors to keep buying its bonds and stave off a bailout, as each costly sale adds to pressure on its public finances and raises fears the euro zone crisis could yet spread. This week the market held its breath as Portugal issued
bonds to finance its large stock of public debt and 10.5 billion
euro 2011 budget deficit.
Portugal is the front line of the euro zone debt crisis and
its capitulation in the face of rising borrowing costs would
bring larger, systemically more important, Spain and Italy into
the firing line.
This week’s sale went smoothly, raising more than 1 billion
euros and with the average yield on the 10-year bonds coming in
lower than at a previous sale in November.
Portugal and others in the EU have a problem. Normal mechanisms (inflate their way out of debt) were negated by the Euro. And their ability to compete by devaluing their currency is also eliminated meaning that competition would require structural changes which take significantly more time. In reality, these members should secede from the EU, allow their currency to float (and therefore be devalued to allow them to compete), and then rejoin.
When things are normalized, we need to examine our ready acceptance and pursuit of debt. We need to change the mentality that debt is wealth when, in fact, it is risk that creates wealth in good times and destroys it in bad times.
The solution is simple: get their finances under control. This will only happen when borrowing is controlled and repayment is real. However, today, the goal is to reduce borrowing, not repay anything. The current belief is that sovereign debt is acceptable.
But, what happens when rates rise? They already did
The world is awash in debt. While fractional banking was good in certain regards, it was bad in that it normalized all debts. Thus governments accepted debt, not just to build roads and hospitals, but to fund operating deficits; then played games to hide liabilities.
When did funding operational losses become okay? A private company would be bankrupted if they based their ability to borrow on revenues and not net income. However, somehow governments came to believe differently and created a generational shift of responsibility, kids being forced to pay their parent debt.