ANALYSIS Interest rates on sovereign debt soared this week, prompting urgent meetings at the ECB and rekindling the trauma in Portugal. Pedro Santos Guerreiro’s analysis
And suddenly, the ECB woke up panicked for fear of a sovereign debt crisis in Europe. It is with the same suddenness that the interest rates of the bonds of the most indebted countries have soared. And almost all of them are more indebted. For Portugal, it is a backtrack which preceded the intervention of the troika. For Europe, it is a flashforward for debt-intoxicated countries that pretend everything is under control and hide the risk from their people. Good morning vietnam.
Everything is not under control, it never has been, everything has been in the hands of the ECB for a decade. The names of the intervention policies are bizarre, so the public will not understand them on purpose. But what the ECB did was permanently transform the emergency: it injected money into the economies by buying assets from the banks; lowered interest rates below zero as if it were normal to pay to borrow; and it bought countries’ debt to create demand in the “markets” and artificially lower interest rates.
It was never European altruism. It was never “let’s change policy for Portugal and Greece because they are also the children of the people”. It was always the risk of the collapse of the euro. It was always Italy, too big explode.
None of this is new. What is new is inflation and the way it drives up interest rates. The announcement of the withdrawal of support from the ECB resounded in this sudden. Like a whip.
As I said a few days ago, “the breast is finished”.
The ECB, which met urgently on Wednesday morning, will have to invent another bottle. And restore the supports. The euro needs friends.
1. The “mother’s sons” of markets
To position ourselves: there are several interest rates, they are all linked and they all go up. Last week, the ECB raised the attendance fees after a decade. These are the rates at which the ECB lends to banks. They were at zero. The contagion to Euribor rate it was immediate. These are the rates at which banks lend to each other and which are used in home loans. They have been below zero for more than six years. Then, the States issue debt, in contracts of six months, one year, five, ten, paying primary market rate who you lend them to. Portugal has been paying around zero for years. Finally, these sovereign bonds are exchanged every day by investors who buy and sell them, forming rates that vary every day. here are the secondary market ratewhich were just above zero.
It was those secondary market rates that soared this week, leading up to the ECB’s emergency meeting. Italy exceeded 4%, Portugal reached 3%. Oh Jesus, we remember traumatized when in 2011 the government said that if these rates hit 7% we would need a bailout. They would rise above that. And rescue came. And austerity. And the recession. And to “oh Jesus”.
And then came the disguised pooling and cancellation of debt.
The previous sentence is controversial. I’ve written it in various texts for a decade and every time I write it I get messages that it’s not true. I insist: yes. But that’s it, read the next sentence as an opinion, not an undisputed fact: Portugal has benefited from an indirect waiver of interest for a decade.
When the ECB launched its rescue plan for the euro, it pooled the risk. In Mario Draghi’s famous “whatever it takes” speech, the ECB created a European insurance for national debts. Thus, countries like Portugal, Greece or Italy started to pay the “German risk” instead of the national risk. It is the pooling of risks.
When, in the pandemic, the taboo of joint debt issuance was torn apart, it went further, the door was opened to debt mutualization itself.
The pooling of risk has allowed Portugal to borrow for a decade at interest rates that do not correspond to its risk. A country with more than 120% of public debt pays almost zero interest rates? That does not exist. And so, yes, we have benefited from indirect debt forgiveness, via ridiculously low interest rates, which has saved Portugal hundreds of millions of euros a year. Amen.
It’s not the “sons of bitches” of the markets who are nice. It is the bosom of the ECB.
2. Mamma mia, Italy
I have written it many times, out of conviction and without cynicism. It is not out of remorse or acknowledgment of mistakes that Europe came to Portugal in the same way as it violently shook it in 2011. We were – we like Greece – first humiliated and then saved , only as a side benefit of the panacea to Europe’s real problem: Italy.
Italy has one of the largest public debts in the world, its importance in the European Union is founding and above all it is too big to fail without implying the collapse of the euro and, possibly, of the EU itself. It’s not just a financial and economic problem, it’s a political problem. Italy has been threatened for years by populist and anti-European forces, so much so that Mario Draghi was not properly elected to command the country, he was appointed, and he was with the endorsement of the European board. He is the Prime Minister whom the EU loves and appreciates because he sees in the former President of the ECB the leadership of a technocratic government to save the country politically and financially.
As I wrote at the time, it was because of Italy (or the fear of Italy) that European politics changed. It was because of Italy (or the fear of Italy) that at the start of the pandemic, Europe opened the seal on the joint debt issuance and launched the bazooka, giving chills to countries like the Netherlands or Austria, not to mention a part of Germany.
Because the pandemic had ruined the plans.
3. Damn pandemic
Europe was already a region of heavily indebted countries with little economic growth. But the pandemic put an end to everything, causing public debts to skyrocket and the economy to collapse, spreading the pressure on countries like Spain or France.
Seriously: look at this chart:
Public debt in the euro area
Say now: have you lent money to these countries for zero? Not. Neither you nor the “markets”. With the withdrawal of support from the ECB, credit insurance is fading and, in the eyes of investors, it is every man for himself. Do you see Portugal on the chart? And Italy? And Greece? And the European average close to 100% of GDP? It’s true. So it’s.
4. Fucking Poutine
The war dealt a second blow to the plans. Inflation was already on the rise, as economic support boosted demand, warming economies. The war drove inflation, mainly through energy and food, to desperate levels. Europe was beginning to face the risks of stagflation and the ECB was reluctant to raise interest rates, which both lowered inflation and economic growth.
Until it does.
And announced the rise in interest rates.
And interest rates have skyrocketed.
And after six days, the ECB panicked and convened urgently.
What to do?
5. Emergency Assistance
Europe has never left a crossroads. It is not possible not to raise interest rates, otherwise inflation will remain too high and will continue to eat away at people’s incomes, impoverish them and depress economic growth.
The risk of an economic recession next year is real.
But Europe will have, at the same time, to reactivate, through the intermediary of the ECB, programs of purchase of assets and public debt, under penalty of leaving each country delivered to the devouring of the “markets”, seeing its public debts increase and have to collect more taxes to pay them.
But there is more: the European bazooka was crucial, not only for the money but above all to break the taboo. The second time is always easier than the first and the war brought a new justification for the reinforcement of the European economic support then created “only” for the pandemic.
It’s not a total response, at the risk of prolonging dependencies, it’s an urgent response that seems inevitable. But this requires applying European funds with much more skill than has been done so far.
6. And Portugal?
Portugal has been a beggar-dependent country for a decade. He first demanded a ransom, then demanded low interest rates, and finally demanded European support for the PRR. Government propaganda tells us no, that everything is spectacular, and the truth is that this year we are going to have strong economic growth, the State is putting in more money with inflation (because of the VAT) and it is going lower the debt (also benefiting from inflation, which devalues the nominal value of the debt).
We are a whooper swan. We are going to have a big growth because we had fallen a lot and because tourism (fortunately) is recovering a lot. But you open any newspaper of the past few days and you can see emergencies in hospitals closed, airports overflowing with queues, supermarket prices climbing mountains, diesel gushing up, unions demanding wages. The wick approaches the barrel and there we will hear the Prime Minister blaming the pandemic and the war and the “markets”, the usual denim.
Portugal needs to reduce its public debt, yes, and to carry out reforms in the state and in the economy that the absolute majority not only allows but also demands. It must tell the truth to its citizens, rather than designing oases that do not exist or are ephemeral. And it must make good use of Community funds to increase investment and give companies the freedom of choice for innovative projects. And it doesn’t happen. The PRR is being used slowly and as a compensator by the state for its lack of investment over the past decade. It fills holes in the national road instead of opening up paths for growth.
We traumatized rescuers watch this rising interest rates and are furious. Soon we are talking about “markets” again, we call them “son of a bitch”, we castigate loud and clear the rating agencies and we howl against the financialization of the economy. We’ve been there. We already know that, for indebted people like us, it is useless. The “markets” are nobody and everyone invests. And when we look at the public debts of Europe, we see the denial of governments and the excessive dependence of the ECB.
In this emergency, we need the ECB to calm the “markets” quickly. But we must understand the dimension of the European political problem and come out of the denial in which we live in Portugal, a country that is content to live off tourism, to sell businesses and real estate to foreigners and to live one day at a time accepting language propaganda and the fate of famine.
Rising interest rates could wake us up. Or it can put us to sleep again, waiting for Europe to sort it out. Perhaps it will even soothe. But methadone is also addictive. And the worst of them is not wanting to see. See what? The mirror that doesn’t twist.
It’s not an epilogue, it’s just the beginning. Yesterday, in the sky, we could see a huge full moon, the “Strawberry Moon”. In the same sky, the waning quarter follows.