Lest We Forget the P in PIIGS

Portugal announces ‘enormous’ tax rises – FT.com.

Map of Portugal

I am sick to the death of the Eurocrisis. The whole continent has been on the brink of disaster for almost three years now. You would think that after observing three years of busted deadlines and missed budget targets that reporters would finally change the optimistic “country is on the right track” narrative. Maybe they’ll figure it out one day, but not today and not with this article.

The Portuguese government was forced to discard planned cuts as part of the troika-mandated austerity package following protests. For some reason, the article calls the protests “an unexpectedly strong backlash against austerity.” Meanwhile, if one turned on a television or logged onto the Internet, one would have seen that austerity is being protested in Greece and Spain. The Portuguese people are smart enough to know that they are being screwed, too.

In keeping with the rosy mainstream narrative of the Eurocrisis, today’s bond exchange was characterized thus:

Despite fiscal struggles, Lisbon received encouragement from investors earlier on Wednesday, exchanging €3.75bn of government bonds due next year for longer-term debt.

Let’s be clear. Th exchange was not a bona fide exchange between two arms-length participants. Portuguese banks were “persuaded” to exchange short-term debt for longer-dated instruments.

I am basing this opinion on the same things going down in Greece two years ago. Either way , we don’t know, because no one bothered to ask the finance ministers any questions about the exchange participants. Not that he would have told the truth, but at least someone should have tried to get some real information out of him.

The news gets worse. Portugal will miss its 4.5% deficit target  and was projecting a 6.1% deficit. In order to reduce this number to 5%, it is raising taxes at the troika’s behest. Unfortunately, tax increases will only raise the budget deficit at this juncture.

People are broke and cannot afford to pay more taxes, so they will do as the Greeks and evade them. If you have been paying attention to the eurocrisis, the failure of tax increases to cut deficits should be foreseeable. When Portugal announces an actual budget deficit greater than 6.1% for 2012, don’t be surprised.

The situation will come to a head next year. The troika is forecasting a mere 1% shrinkage in the economy when its major trading partners have entered a recession and the Portuguese economy has worsened dramatically since the forecast was made. All the optimistic numbers you see for Portugal are based on this incredibly sanguine growth forecast.

At the rate its going, Portugal will need another bailout soon. Just don’t be surprised when it happens.

dareconomics.wordpress.com

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