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The relativity of numbers ex-ante and the budget execution report for January 2011.
The numbers that were released on weekend on budget implementation in January pointed to a decrease in the deficit of public accounts in January 2011 in the order of 58%, € 398 million, but an odd number have a little value before the numbers discriminated. Which were only released on Monday, February 21th.


Tax revenue accounts helps for more than 90% for the decrease in the deficit - in the state budget for 2011 was registered as one third of the adjustment would be via revenue and two thirds via decrease in public spending. Direct taxes have also increased revenue by 26%, with the IRC to check an increase of 153.4% over January 2010, justified with the anticipation of dividends by the Portucel, Jeronimo Martins, Portugal Telecom and Semapa - Tax obtained was 253 M € in January. But indirect taxes also contributed to the rise in revenue, particularly the segment of vehicle tax (59.9%), followed by the movement car tax, where revenues grew 46.4% and the VAT goes up € 60 million, mainly due to higher car sales in December, in anticipation of the VAT increase of 2 percentage points and the end of incentives to slaughter car. Conclusion: Much of the decline in 398 M € revenue comes from "extraordinary" that will not happen in the coming months. Proof that we can be very close to the inflection point of the Laffer curve. Most likely we are already in the downswing of the curve and the proof is very low tax revenue - the revenue is purged "extraordinary" - despite the increases in tax rates. Revenue may even start to decline if there is an economic downturn in Portugal of 1% in the coming quarters.

Actual expenditure in the state rose 0.9% in January, a fact justified by the twelfth-enforcement regime, otherwise the government expenditure would have fallen 2.6%. Personnel expenses grew at 4.9% month under review, a period marked by cutting wages in the public, also justified by running in twelfth in the first quarter 2010, as evidenced for example the promotion of armed forces personnel and increasing subsidies on the condition of the military, decided in 2009 only began to be paid in 2010. Interest of the public debt also increase by 23%.

How foreign investors look at these numbers? With apprehension. The most severe is the Portuguese boast a few days before the descent with a 58% deficit in January. For a manager of debt that matters is knowing in detail the numbers of the newsletter. What the Portuguese think they are the financiers of the Portuguese economy? The way is become increasingly tight. Portugal need borrow this year 46,000 M € (almost one third of total public debt). In April we have a ”trial by fire” with a series of 5 years amortization the value of 4342 M €. In June with a series of 10 years amortization the value 4933 M €. Refinance these rather complicated series of how the Portuguese behavior with their lenders.

The key is public spending. Have to get down under threat of jeopardizing the entire effort of the Portuguese who brought the austerity plan of the state budget for 2011 and measures taken in May 2010 with the IRS increase of 1% and 1.5%, VAT increase of 1 percentage point.

The opening of a new series to five years through a Bank syndicated transaction of 3500 M € on 7th February Treasury Bond at an interest rate (coupon) of 6.4%, not more than obtaining financing without looking at the rate that would pay. Now the reference of yield (5 years) in the secondary market is sustained above 7% and the interest that will enter the public accounts of the state will issue 6.4% in 5 years when we have emissions to 10 years that contribute with rates of 4.8 and 5.2% in your coupon. True, it is better to pay the interest now than it must defer and defer repayment for their part, but when there is a range of 6.4%, possibly because those who do think is not going to get cheaper financing in the future. The light at the end of the tunnel is increasingly a mirage...

Paulo Rosa, Economist, February 22, 2010
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The issue of portuguese public debt held at 12 January 2011 and the Euro Monetary Zone.
The best of both worlds is always difficult. The constants trade deficits and public deficits, sooner or later will be corrected. The development of effective interest rates - yield - of the Portuguese government bonds are linked to the budget execution and the perception that investors have the ability of Portugal to honor its debts - this fact depends of the economic growth. It is probably not sustainable without economic growth at around 4%, issues around the 7% that make up the average price of the interest of the entire Portuguese public debt.


Emissions of public debt held at 12 January were in line with the prices of such series in the secondary market. The issue with maturity on June 15, 2020, a reopening and not a new series, put 599 million euros at a price of 86.91% and a yield of 6.71%, raising the portuguese state 520 million euros. In August it had paid 96.15% with a yield of 5.31%. The series has currently a total 8551 million euros to be paid at maturity and the coupon is paid annually at 4.8%. There is a deferral, increasingly, the payment of a portion of the interest for 2020, due to the growing differential between the coupon payable annually and Yield found in each auction. Government accounts for 2011 and future years are not affected because the fee is 4.8%. The bill will come in 2020.


A Monetary Zone requires an economic policy capable, mirrored on two pillars: fiscal and monetary policy. The eurozone has a monetary policy by the European Central Bank since January 1, 1999 and the national central banks play the role of regulators and supervisors of internal financial activity. Fiscal policy is held by national governments, although some probably have already transferred some of their freedom to the Eurogroup. At the foundation of the Euro were plowed some important points, as the limit of public deficit 3% of GDP and public debt 60% of GDP, but national governments have their projects, agendas, calendars election. Here there is divergence of fiscal policies that influence the price of the underlying currency, the Euro. If every country had its own currency, the adjustment would be via the exchange rate and excessive deficits would be corrected with the devaluation of local currency. With a single currency, the adjustment is via interest rates and countries where fiscal imbalances are perceived to pay more for their loans. The market came to the conclusion that the Euro needs the two pillars and the fiscal policy is failing - each country has different public accounts - the currency may suffer. The euro is the only currency which is not a full economic policy worldwide.


The short-term yields rose more than 500% in one year and are close to long-term yields which progressed about 50%. Sign of the uncertainty in the short term for the Portuguese economy and the smooth slope of the yield curve is the proof of a perception of economic recession by the markets.


Investors look for the Euro zone as if it were a chess board. Go down a pedestrian at a time, Greece, Ireland. Problem is if it falls a bishop, or Spain. There will be a "check to the king", ie Germany, by disbelief in the monetary union and return everything to the beginning of the game, now with different chess board. The German mark currency accounted for 17% of world reserves in 1999, compared with 70% of the dollar. Today the euro is nearly 30% and 60% U.S. dollars. Likely, hypothetical European government bonds would be a viable solution to consolidate the Euro Zone, but the Northern countries want to see tighter rules against this scenario and possibly go through a great European budget.


Paulo Rosa, 13 January 2011


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Currency and Economic Policy
There is no doubt about the success of the placement of debt issuance on 12 January, if the goal is to have funding for the state continue to operate, and the placement rate less important.  But an economy that does not grow have, probably, an impossible task to pay interest at 7%. Success is identical to put a bullet in the barrel of a gun and play Russian roulette, just one day success.
The euro is the single currency in the world that does not have a full economic policy. Gordon Brown has warned Tony Blair of the obstacles that might arise with the accession to the euro. The U.S. has debt problems relevant in some states (California has an A-rating given by S & P, similar to the Portuguese Republic), but there are transfers of funds among states. In the century XIX Belgium, France and Switzerland shared the same currency for 30 years, but ultimately failed for lack of a single fiscal policy. Scandinavia also had a similar experience with the Crown. The sovereign debt crisis culminates in a kind of European federalism? This crisis can help Europe to strengthen itself. What does not kill us makes us stronger.
In Europe, fiscal policy by force of circumstance, are markedly tightening, in contrast to monetary policy. Austerity to address the consolidation of public accounts will bring more economic recession, more unemployment, more bankruptcies, less private consumption, lower tax revenue. It's a vicious cycle, a downward spiral. More recession that will result in a worsening financial situation and rising public debt. The adjustment has to be built via cutting public spending, not tax increase. You can’t break the legs of a person and then ask to get up and walk.
The Portuguese government debt crisis was anticipated by the global financial crisis that began in August 2007. Portugal has a structural problem: an economy with anemic growth and public finances depleted, which does not allow the bank go to the debt market since May 2010, after it was reflecting on the difficulties in financing the economy. Trade deficits of 10% will accumulate in the gross external debt of 250% of GDP, which Portugal has to pay, but the external assets pay interest, rents and profits, so the net external debt is less than 100%. The main problem is the public accounts, even though families and businesses were heavily indebted in the last decade. We entered the Euro with a public deficit (less than Spanish), the high domestic consumption and significant spending contributed to a significant growth in GDP and an "illusory" low public deficit as a percentage of GDP. The under budgeting is the key word in the last decade. The decrease in the deficit reached in the years preceding the 2008 crisis was due to the transfer of capital expenditures out of public accounts (later they will be paid). Those expenses are through “public-private” partnerships for highways, municipal companies and others debts off the public balance.
The International Monetary Fund (IMF) and European Financial Stability Facility (EFSF) not bring lower interest rates. Bring the guarantee of financing, end the uncertainty and return liquidity to banks and markets. The IMF will only be called when the Portuguese government (and approved by Portuguese Parliament) can’t access the market. Ireland on the 1st tranche of the loan is paying 5.5% for a period of three years, precisely the 3 years treasury bond yield of Irish debt on the day before the IMF is called.
Paulo Rosa, 16 January 2011
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Savers and speculators of Portuguese Public Debt
Investors who allocate their savings into public debt of periphery countries, and do so based in Portuguese adage "the save is the gain", are from countries with a strong culture of saving and are currently before the dilemma of selling part of the savings (and lose) or stay and risk the progress of public accounts of these countries.
Speculators will give liquidity to the market and try to guess the minimum price of Public Bonds. Preventing the yields of government bonds are higher.
The Portuguese State in 2011, intends to borrow 46.000 million euros, approximately 32% of total debt and 28% of Portuguese GDP. Renew maturing debt 35.000 million and 11.000 million to plug the “hole” between revenues and spending. The vast bulk of emissions, about 25.000 million, has expected by the end of April.
There are several factors combined at the same time that will determine the performance of interest rates of our sovereign debt and the likely appeal the IMF: 1. The budget execution; 2. The Portuguese economy; 3. The evolution of the yields of government bonds, including the Greece, Ireland, Spain and Italy; 4. The national debt purchased by the ECB; 5. The accountability of holders of public debt in case of default of the country.
By April, if Portugal issuing debt 3 percentage points above the average we have seen, this implies paying only interest, over 750 million euros (0.5% of GDP).
If you watch the escalation of 10 years Treasury bonds yields to close 10% in the secondary market, and the shorter-term rates - at the beginning of the yield curve, as we are seeing in 2-6 years - we have an average 6 percentage points above normal and an increased interest in more than 1.500 million (nearly 1% of GDP) going to service the debt from the current 8% of total public expenditure to almost 11%.
It will not be easy to bring the budget implementation to fruition if we watch the pressure to make exceptions - and only within 3 weeks after submitting the state budget, as we saw several. The pressures tend to increase as the challenge increases. The runaway spending this year is the proof of what may happen.
In economic terms and if we use the expenditure approach to calculating GDP, we can’t rely on public spending, private consumption and investment. These engines will not pull the economy in 2011 for being "seized" by the measures of the austerity plan. It remains the engine of exports that has behaved reasonably, but we can’t belittle the continuing trade deficit in recent decades, about 10% of GDP.
Imports are a drag, but the lower disposable income and the reduction of state expenditures can contribute to good performance. However, there are imports which do not undergo significant changes due to the popularity almost rigid case of petroleum products with a weight of about 10% of total imports.
Putting the economy to grow is a Herculean task due the austerity plan. For specialists in economics, just say this: the silence of taxes and the Laffer curve are relentless. The Laffer curve shows that there is no charge to tax if no income or if income is 100% absorbed by taxes. In mathematical terms, is a parabola concave to the origin, whose function will be an optimal collection of tax and from which we will see a turning point.
May we be at this point? The VAT of 21% to 23% will never generate a revenue of over 9.5% and with such high rates may trigger either the economy or to the relocation of businesses outside the country, whether the inhibition of other settle in so that revenue can’t even grow up and down. Neither the silence of the tax, ie tax anesthesia show that indirect taxes - consumers often are unaware of the increased tax burden continues to consume - will come to compensate for the loss on the economy. The tax burden in Portugal is proportionally similar to the Scandinavian countries.
As for the evolution of interest rates of government bonds of countries known by the acronym lately GIPS (Greece, Ireland, Portugal, Spain and Italy, in order of probability of entering into default), they depend on the movements of investors, speculators.
Investors in Treasury bonds are savers who are selling with loses and have a face: are German, English and French. Put your money in fixed income funds, which by definition have a low risk because they are mostly government bonds, put at risk their savings to finance countries that consume more than they produce.
In La Fontaine's fable, the ant has amassed during the summer to cope with the harsh winter while the grasshopper lived without problems. Who bought the debt 10 years in the issuance of September 22 is losing 5% and those who hold government bonds acquired in the first quarter of the year is losing more than 20%.
These investors, faced with uncertainty, prefer to sell rather than risk losing a default. Could maintain the bonds and does not push them into buying low and Credit default swaps to cover the investment risk. However, in many cases it is not profitable and we are also talking about an unregulated market, with an increased risk.
The national debt held by non-residents, since the beginning of the year, decline from 85% to 65%. But who are the speculators? “Persona non grata” that feed on the misfortune of others? In the debt market are speculators lurking for good opportunities and are mostly from the buy side to hold the bond prices. Without them the interest rates most likely would be higher today.
The double fear of calling the IMF and that the bonds traded on the secondary market have a similar behavior to the Greek government bonds, increasing selling pressure on the Portuguese debt. Hellenic 10 years Yields are around to 11.5%. The yield curve, rates are higher than shorter-term rates at the end of the curve. Interest rates of 2 to 5 years are around 13%, a sign of the uncertainty in the short term about the evolution of the Greek economy and the negative slope of the curve reflects a perspective of economic downturn. Many investors do not give the benefit of the doubt to the Portuguese debt, fearing a similar situation to the Greek.
Paulo Rosa 16 November 2010
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Licenciado em Economia pela Faculdade de Economia da Universidade do Porto.