Portugal to hold fire-sale of state assets

Under intense pressure from Germany and the Troika (IMF, ECB and European Commission), Portugal is about to engage in a fire-sale of its assets.

Regular readers know that this fire-sale will accomplish nothing positive for the citizens of Portugal.

When dealing with a bank solvency led financial crisis, the critical first step is to require the banks to absorb upfront all of the losses on the excess debt in the financial system.

By taking the first step under the Swedish Model, the link between bank book capital levels and sovereign debt is severed.  

At the same time, the sovereign can continue to guarantee bank deposits.  This allows the banks that are capable of generating earnings before banker bonuses to continue in business and rebuild their book capital levels.  Banks that cannot generate earnings must be resolved or merged into banks that can.

Without taking this first step, countries are tempted to bailout their banks.  This links bank book capital levels.

Even worse, it places the debt service burden of this excess debt on the real economy.  This creates a drag in the real economy since capital that is needed for growth and reinvestment is now being used for debt payments.

Your humble blogger observed that a fire-sale of the state's assets would accomplish nothing positive because it is simply generating capital that will be consumed by the debt service burden of the excess debt.

As reported by the Guardian,

Portugal is to embark on a sweeping fire-sale of state companies over the coming months, possibly even privatising state broadcaster RTP, as it bends to the will of the troika of lenders that bailed it out 20 months ago. 

With the government of prime minister Pedro Passos Coelho hoping to persuade the troika of the European commission, the European Central Bank and the International Monetary Fund to treat it more leniently in 2013 by lowering interest rates on loans, the sell-off of national companies is seen as one way of winning support....

The lesson from Ireland is not to expect more lenient treatment.

The bailout exercise is all about extracting as much from the country and its taxpayers as possible so as to minimize bank losses and preserve banker bonuses.

The troika has told Portugal to sell €5bn of state companies as part of the deal which saw it receive a €78bn bailout in May 2011. But it looks set to beat that target thanks mainly to sell-offs in the electricity sector and in airports.... 

Under the bailout plans, Portugal is due to return to bond markets in 2013. Its borrowing costs have tumbled in recent months, with 10-year bond yields finally falling back to pre-bailout levels of below 7% shortly before Christmas. A successful return to the markets would be seen as a sign that the euro crisis was finally being solved.

The euro crisis is far from being solved.

For example, Portugal is mired in a deep recession.  Who would buy its debt when both the tax base and asset base is shrinking?

Passos Coelho's government hopes that the troika, which recently eased lending conditions to Greece, might do the same with Portugal – lowering interest payments and making it easier to cut the budget deficit. Portugal's debt is expected to reach 120% of GDP this year and it currently pays 3.6% interest on troika loans. 

Germany has already said it opposes a softening of the bailout loan terms, with its finance minister, Wolfgang Schäuble, saying that would look as though Portugal was unable to meet targets. "It would be a devastating signal and I would really advise them not to pursue this point any further," he said. 

The government should take this to heart and stop bailing out its banks and selling its state assets.

Instead, the government should require its banks to take the first step towards ending the financial crisis and recognize their losses.

Portugal's economy shrank by 3% this year and the country has lost almost 6% of GDP since the credit crunch of 2007.