Fears that Greece will need more financial aid than estimated pushed the yield on the nations 10-year bonds up to 8% yesterday. But the crisis are now clearly spreading to Portugal where the 10-year bonds have reached 4,77% – 1,7 bps higher than German bunds. IMF says in its Global Economic Outlook that Portugal is likely to miss the target set in its stability report. Europe is on fast track to its worst case scenario.
“Portugal and Greece share a key feature, namely an extremely low rate of national savings, which implies that they have to rely continuously on large inflows of capital to finance consumption.”
Alcidi Cinzia/Daniel Gros
El Pais points to the IMF’s latest forecasts, in the Global Economic Outlook for Portugal, which show a strong downward revision for 2010 – to 0.3%. The report also mentioned that Portugal will miss the targets set out in its stability report. At the end of this year, the IMF calculates that Portugal will have a deficit-to-GDP ratio of 8.7%, while the deficit reduction will then proceed only at snail’s pace.
In other words, the IMF believes that the stability programme of PM Jose Sokrates is a joke.
The E.U. Commission believes the same, and has recently asked Sokrates to make bigger efforts.
IMF Raise Global Forecast – Except for Euro Zone
The IMF has raised its global growth forecast from 3.9 to 4.2% for this year, except for the euro zone, which is unchanged, while growth for Italy and Germany are revised downwards, for both 2010 and 2011.
The statistic tells a lot about how perceptions have been changing; for China, the 2010 forecast is unchanged at 10%, but the 2011 forecast has been raised by 0.2pp to 9.9%.
IMF says the euro zone is more at risk from the global economy, than from Portugal and Greece
Jornal de Negocios reports that the deputy chief economist of the IMF was predicting that the future of the euro zone would depend much less on Greece and Portugal than on developments in the world economy.
He says Lisbon and Athens are not a threat to the cohesion of the euro zone, because the situation would be “properly managed.”
(One might wonder where he gets his optimism from, considering the experiences we have with crisis management so far.)
The “Media Conspiracies”
Incidentally, the Portuguese business press, is full of stories this morning telling us that this contagion is not justified, citing anybody who defends up Portugal.
Commerzbank for example, which says that contagion has no fundamental justification, while severely criticizing those who say a negative word about their country.
“We observed the same phenomenon in the early stages of the Greek crisis, which was regarded initially as some foreign, or rather anglo-saxon plot against the country,” the eurointellligence.com writes.
Not All The Same
In Vox, Daniel Gros and Cinzia Alcidi make the case that the southern European countries are not all alike.
“Portugal and Greece share a key feature, namely an extremely low rate of national savings, which implies that they have to rely continuously on large inflows of capital to finance consumption (see Gros 2010). By contrast, Spain and Ireland have substantially higher savings rates, but are more exposed to financial markets because their construction booms went hand in hand with a huge expansion of financial activity. In short, for Greece and Portugal the problem is insolvency; for Spain and Ireland illiquidity. Italy seems different from both these subgroups in that its savings rate is higher than even in Spain and Ireland and its foreign imbalances are much smaller,” they point out.
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