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
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