Why am I bullish on Portugal, do you ask? Consider the scenario in the below graph. It assumes that interest rates stay high for two years, a double-dip recession next year, annual GDP growth never passes 2%, and Portuguese politicians never balance the budget. That pessimistic scenario stabilizes the country’s net debt (the light green line shows the debt-to-GDP ratio on the right axis) within four years.
That is not to say that there isn’t a lot that could go wrong. The markets might panic. The E.U. might fail to calm them. Portuguese politicians might fail to cut the deficit at all. Growth might stall out at less than 2 percent. The ECB might fail to keep inflation at the 1.7% these projections assume. But that’s a lot of mights.
Something to note is that with the exception of financial corporations, Portuguese companies borrow at better terms than the Portuguese government. If the markets believed that a Portuguese default was really going to impose crushing taxes on Portuguese companies and wreck their access to capital, then this pattern should not hold. But it does! Of course, I don’t believe much in efficient markets, so I take no solace from that.
You know who should take solace in the pattern, though? The European Union! More precisely, Angela Merkel and crazy German public opinion. If markets panic over Portuguese debt, and yields start to spike, then the E.U. should happily lend Portugal the money it needs to tide it over. They will almost certainly come out ahead.
Moreover, as the markets suggest, the Portuguese economy has some green shoots ready to sprout. Renewable energy and smart systems are the biggest. But there is also a government that aims to preserve infrastructure spending, which bodes well for future growth. Of course, the New York Times would portray that latter as a bad thing. It wrote: “The government’s failure to rein in spending — and its decision to spend on yet more highways and toll roads instead of investments that could produce direly needed economic and export growth — has soured relations with the opposition Social Democrats.”
Huh? Of course, this is the same newspaper that in the same issue was stupid enough to write the following about Mayor Bloomberg’s nominee for chancellor of the public schools: “She has shown a common touch as president of Hearst Magazines since 1995 by riding in yellow cabs rather than black limousines.” So you shouldn’t take their misgivings too seriously.
In short, Portugal is not Greece, and I’m bullish on their prospects. Of course, “bullish” is relative. In absolute terms, Portugal’s prospects aren’t that great. But they are much greater than the doom the markets are predicting, and in this case, I’m willing to take the bet. As is East Timor.
Thanks< Noel! Linkworthy, this.
Posted by: Randyfmcdonald | November 22, 2010 at 12:14 AM