The Real Debate on Helping Portugal

German Logo of the ECB.
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The European Central Bank – Printing Euros to Help Portugal

The Portuguese government has managed to borrow the money it needs for now. It raised over 1 billion euros in an auction of government bonds.

The Daily Telegraph quotes the Portuguese leader as saying, “Portugal will not request financial aid for the simple reason that it is not necessary”.

The BBC reckons that “even with this auction, most now consider it a question of when, not if, Lisbon will join the list of eurozone governments turning to Europe and the IMF for emergency support”.

Portugal’s success in raising this money, no doubt, was due in no small part to the implicit support of Europe – investors expect Portugal to be bailed out rather than fail to repay the bonds.

The Telegraph says:

Portugal is facing a split between its political leaders, who insist the country does not require a bailout from the European Union and International Monetary Fund (IMF) to deal with its budget deficit, and members of the Portuguese central bank who support accepting financial aid.

More light is shed on this split by a paragraph buried in that BBC article:

Bond buying by the European Central Bank (ECB) had helped keep the yield below 7%.

In other words, Europe is already bailing out Portugal, in this case by what would be known in the UK and US as “quantitative easing”. The ECB is printing euros to bail out Portugal.

No wonder the bankers want Portugal to take a bailout – they are doing their job, of protecting the currency. They want to stop printing euros, and get Portugal to borrow the money explicitly.

Thus it appears that the real debate, going on behind smoke and mirrors, is not whether Portugal should be bailed out. The real debate is whether the bailout should be funded by printing euros, or by borrowing from the European Union’s emergency bailout fund or from the IMF (both representing funds borrowed from other countries).

The politicians want to use money-printing, while the bankers want to use the borrowed cash.

The politicians want to debauch the currency, for two reasons.

First, their citizens won’t notice the debauchment, while they would notice the higher taxes needed to repay borrowing from the emergency funds. If Portugal is lent money by the emergency bailout fund, that money will need to be repaid, with funds raised from Portuguese taxpayers.

Second, it would be the euro being debauched, and the resulting inflation would hit the whole of Europe and not just Portugal. It suits Portugal for the bailout to come from money-printing. With money-printing, the borrowing is lost in a sea of inflation covering all of Europe. Is it really likely that the ECB would ever get the money back for bonds it bought in this “shadow QE” programme?

All of that, of course, also explains why the Germans are so keen for the Portuguese to take a bailout. If they take the bailout, Portuguese taxpayers eventually pay. If QE is used instead, then Europe’s currency is devalued, and the Germans and others will share the pain of the resulting inflation.

Most people in Europe probably think bailing out Portugal represents non-Portuguese Europeans sharing the pain of the Portuguese. The truth is the reverse. A bailout would ensure that the pain was concentrated on Portuguese taxpayers.

Of course, there are two more alternatives: the Euro could be scrapped (which would set off a political storm in Europe and destabilise the continent for decades to come), or Portugal could explicitly default on its debts (which would set off a financial storm that would engulf Europe’s – and indeed the world’s – banks). But both of those alternatives are too awful to contemplate, for any of us.
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