quinta-feira, março 03, 2011

Adjustment effort must focus directly on balance of payments

Rating agencies maintain the Republic of Portugal on negative watch. 

Why keep kicking a deficit country when it's down?
Why not step back and take a good look at the surplus countries? 
Maybe they have some part in the problem too?
After all, financing deficit countries is truly the job of the surplus countries, the ECB is just a proxy. 

The view from Lisbon is as real as it gets, with no rainbows in sight (except in the PPP Lusofonia blog). 
Before we cut salaries 20% as recomended by another commentator, we need to stop importing German cars and submarines, French cheeses, Italian shoes, Spanish olive oil, Finnish celphones, not to mention all manner of Chinese stuff. 

Curiously, the €20Bn of Portuguese public debt that the ECB may have bought in 2010 was just about enough to cover Portugal's merchandise trade deficit. Portugal hast to import food and fuel, but it no longer has the policy tools to cut superfluous imports, most bought on too-easy credit. And about three quarters of Portugal's trade deficit is with the other Eurozone countries. Perhaps the German export machine could have done just as well without the smallish Portuguese market, but the fact is that they didn't. 

The money from the ECB largesse didn't stay in Portugal long enough to accrue interest. 
Who benefitted most from it? Probably not the Portuguese, who could have done just as well without the 38.8% increase in the,  mosty imported, auto sales in 2010. 

Even without the benefit of the traditional exchange rate price signals, the professional external creditors could have noticed earlier if the debt accumulation was reaching dangerous levels. 
Pity not the creditors: For every foolish overleveraged irresponsible borrower, there is one, or more, equally foolish imprudent  overextended irresponsible lender. 

Any adjustment effort must focus directly on the balance of payments, and it must count on the direct support of the surplus countries. Relying exclusively on fiscal policy to correct external imbalances is like playing piano with mittens: a lot of ear-wrenching noise but hardly any music at all.