EU Bust-Up Seems Closer As Portuguese Default Looms
By Staff News & Analysis - March 24, 2011

What's next for Portugal after PM's resignation? Portuguese Prime Minister Jose Socrates (left) resigned on Wednesday after parliament rejected his government's latest austerity measures, designed to help Portugal avoid having to seek an international bailout. Is a bailout inevitable? It looks likely. At around 7.8 percent, Portugal's 10-year government bond yield is well above the 7 percent level, which many analysts think is unsustainable in the long term. The five-year yield is even higher; similar inversions in the yield curve were seen for Greece and Ireland before they sought bailouts last year. After the rejection of the austerity measures, Portuguese yields could rise further unless a new government quickly comes up with a fresh austerity package – but forming a new government could take many weeks. Socrates and his Socialists firmly opposed a bailout, which would carry tough fiscal conditions; Portugal has bad memories of IMF-ordered austerity in the 1980s. But the main opposition Social Democrats (PSD) have not ruled out seeking international aid. PSD leader Pedro Passos Coelho has indicated he would seek political cover for any bailout by blaming the last government for it. Other, smaller parties are mostly against a bailout. – Reuters

Dominant Social Theme: Let's put this behind us. Thanks for the memories, Socrates. But, heck … let's not worry. The banks are OK and so is the European Union.

Free-Market Analysis: The footsteps just got louder. The break-up of the EU as it is currently constituted, is coming closer in our view, as we can see from the latest bad news involving Portugal and its potential insolvency (see article excerpt above). For us, the continued unraveling of EU solvency is a big story – a huge one – though you would never know it from the mainstream press, which treats each EU budgetary catastrophe as a serial issue, unrelated to any other.

As expected, Jose Socrates, the Portuguese prime minister, has resigned because opposition parties would not endorse the aggressive austerity plan that he believed was necessary to preserve Portugal's solvency. Socrates didn't have to go, but he claimed a "no" vote would make it impossible for him to run the government logically. The "no" vote came yesterday and Socrates did what he said he would do. He'll still attend the big EU budgetary summit that starts today and it is one that should be enveloped in considerable controversy given what just occurred: the imminent default of another EU member-state.

Socrates resignation is being treated by most of the Western mainstream press as an expected, even logical occurrence. No need to worry; the latest EU setback was expected, even predictable. (Perhaps a further comforting-sounding solution will be presented at the upcoming meeting.) That's the spin anyway. But the reality is a good deal more confused. Just yesterday we presented an analysis of an article in the Financial Times that spelled out the problems with the European Stability Mechanism – which was supposed to help alleviate the pressures under which Europe's failing Southern PIGS now labor – but which apparently isn't going to provide any real help after all.

The basic problem, as we have pointed out on numerous occasions, is that the EU's prosperous North simply cannot be prevailed upon to pay for what is seen as the profligacy of the EU's bleeding South. Of course, this is not an entirely fair interpretation, as the Southern states, in fact, were encouraged by the EU's leadership to spend money and take out additional loans to ensure that the citizenry of these countries came to believe that the EU was a fount of miraculous prosperity. But the prosperity only lasted about as long as it took for the Eurocrats to legally solidify the EU's standing. The continuing financial crisis, which took hold around the beginning of 2008, is in no way resolved, and the finances of southern Europe have generally gone from bad to worse.

"Austerity" is now the buzzword (and rule) of the day. But as predicted within these modest pages, Europe's fractious tribes are not apt to easily accept an austerity that devalues their pensions, slices services, raises taxes and demands privatization of numerous national resources (the usual IMF prescription). There is already considerable civil unrest and now in Portugal that discontent has found a political voice. Let us predict that the Portuguese political reaction may eventually take root in Greece and Ireland, and perhaps Spain as well.

While the latest economic patch, the ESM, allows the European central bank to buy bonds in primary markets, the actual mechanism does not really offer much support to Portugal as it struggles with a large, upcoming debt rollover. Thus Portugal's leaders likely will have no choice but to accept an EU loan package, and not on favorable terms. Given Socrates resignation "later" just became "sooner."

The EU bailout agreement reached last week expanded the bailout fund. But in actuality, since the ESM is considerably constrained in terms of what it can accomplish in the larger marketplace, raising the ceiling has little impact. It all sounds much grander in the press releases than it actually is, as we pointed out yesterday in an analysis of a Financial Times article on the subject. If Portugal seeks a loan, it will receive one; but the terms will be relatively severe and the shock to the economy will be significant as well.

Imagine, a year ago, if one knew that three significant European countries – Ireland, Greece and now Portugal – were insolvent and needed EU funds to pay their bills. Now imagine that these insolvencies had taken place despite the best efforts of the EU brain trust to avoid them, and that a number of other much larger countries such as Spain, Italy and even France had many of the same problems and might be forced to default as well. One could surely argue that the EU system as currently constituted was in jeopardy and that a real crisis was imminent.

It is as American Vice President Joe Biden might say, a "big (effin') deal." The union, consolidated now from 25-plus European countries, was one of the Anglo-American elite's great success stories. And in the increasingly evident and obvious drive toward world government, the EU has occupied a pride of place. It is a regional stepping-stone to a new world order and any setback to the EU is also most likely a setback to elite plans for further global economic, social and monetary consolidation.

But we have never been especially enamored of such plans, nor have numerous others in the alternative news community of the blogosphere. The Leviathan of world government will surely have little or no accountability to those billions that it bestrides. (The EU itself does not, despite protestations otherwise) No good ever came from such unfathomable bigness; and the future of the world's teaming billions will not be enhanced by what Western elites have in mind. The idea of a one-world order – a seamless, integrated peaceful community of billions – can be supported rhetorically but in practice it will be a disaster that will lead to unimaginable, even genocidal, consequences.

Thus, we are not so upset as some about the potential unraveling of the EU, or even the euro. Events seem to dictate that the EU is continually more stressed by its sovereign debt crisis, no matter the moves the EU brain trust take to alleviate the impending problems. Portugal is now the "third" shoe to drop and probably spells a new and more significant phase of the crisis.

What happens next? It may be months (or maybe not) before the larger ramifications are presented formally. But they seem obvious to us. In practice, sooner or later, British, German and French banks will be forced to participate in a bailout to alleviate the crisis. In Wall Street-speak they will have to "take a haircut" and share the pain of Europe's suffering Southern flank by acknowledging the bonds they hold are not so valuable as once thought.

This will have additional ramifications as well. German, British and French banks will not go quietly. If the bankers fail in their attempts to squeeze the Southern PIGS, we believe it likely they will try to squeeze the taxpayers of their OWN countries – similar to how US taxpayers were squeezed to bailout AIG so that foreign banks (and domestic too) woudn't suffer losses. Dire warnings will be trotted out once again. It will be made apparent that the entire world as we know it will topple and fail if Europe's biggest commercial banks have to write down their Southern European loans.

It will be a mess. In the end the banks will take the write off but in fact, some of them are probably not in any condition – even with considerable recapitalization – to withstand the devaluation. There will be failures, or certainly the possibility of significant ones. In such a situation, we would tend to believe that both the euro and the EU might undergo a significant transformation. A two-track EU is not out of the question, or some other reconfiguration.

A Reuters analysis published yesterday estimates that that were Portugal to ask for international aid, it might need between 60 and 80 billion euros. The euro zone's bailout fund and the European Financial Stability Facility, along with the International Monetary Fund, are in a position to provide the funds. But the question of larger defaults (Spain comes to mind) remains. Complicating matters even further, the Portuguese political situation is in flux. It may take up to two months or longer to organize new elections. In the meantime, Portugal will have a "caretaker administration" and little will take place to attempt to resolve Portugal's financial woes.

Socrates, surprisingly, may run again for Prime Minister and he (and his socialist party) should not be underestimated, Reuters informs us. However it is more likely that a center-right coalition shall prevail. Ironically, a new center-right administration will maintain Portugal's commitments to the EU, and continue working to reduce the country's deficit to 2.0 percent of gross domestic from perhaps 4.6 percent this year.

That's perhaps the positive news. But to us it is not at all clear whether such reductions are going to be tolerated. Greece remains unsettled and we expect that the Irish situation will get a good deal worse – from the standpoint of civil unrest – before it gets better.

We are not surprised at what is occurring. Internet driven alternative media has educated millions about the reality of central banking and the corrupt EU experiment itself. At this point there is not much "upside" for Southern European citizens when it comes to maintaining the structure of the EU as it now exists.

After Thoughts

The struggle therefore is between the floundering dominant social themes of the elite (that the EU in its current form is essential to the peaceful profitable evolution of Europe) and the distinctly different information available on the Internet. This is information that allows one to unpack the fear-based memes that the elites use to consolidate power with international organizations. It is proving effective in undermining elite promotions, and even the EU itself. In our view, significant changes may be in the offing, even if Brussels' Eurocrats continue to downplay them in the near term.

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