Investing in Portugal

[jdaw1]

Today’s New York-edition FT has a pull-out section on Investing in Portugal. Those amongst our number thinking of doing that might wish to buy today’s FT.

[uncle tom]

I'm going to hang fire at the moment - the property market in Spain is a disaster area, and while I've not heard much about Portugal, I know they've been getting drunk on cheap money, so a bad hangover is very likely!

When realism prevails, I shall start sniffing around..

..but will they still be using the euro then? The economic divisions in the eurozone seem to be widening...

Tom

[jdaw1]

Yes, they will still be in the ┚¬ zone. See The end of EMU: legal ramifications, February 2000, for reasoning.

But you might still wish to read the FT report — hence my post.

I’ll keep my copy for a few days in case somebody missed it.

[uncle tom]

A long essay Julian, but I disagree with your conclusion.

A member country in the eurozone could very easily re-create it's old currency - or an entirely new one - and convert it's national debt into the new currency.

In the first instance it would probably be wise to value the new currency at exactly the same level as the euro - or a simple multiple or division thereof.

At the outset, the value of the new currency would be locked to the euro.

Businesses and citizens need not be compelled to convert their debts and savings at the outset, but all state salaries and benefits would be denominated in the new currency, and the notes and coin would be the new legal tender.

Once notes and coins had been circulated, a date could be set for the liberation of the new currency, breaking the exchange rate lock.

While there would be some issues and problems to handle, it would not be impossible.

At present we have the likely next PM of Italy calling the euro 'a disaster', very harsh words from the president of France, open hostility from the Spanish media and over 60% of the German population wanting out.

It ain't working for the principal players, so the gain from getting out probably exceeds the pain for them - although the smaller countries would probably retain it, in the short term at least.

The bond markets show inconsistent yields for the eurozone's sovereign debts, so a breakup would appear to be anticipated by the markets.

Tom

[jdaw1]

OK. Portuguese corporation borrowed ┚¬1bn from its bankers for 20 years at a fixed rate of, say, 6.50%. What happens to this debt?

• Stays in EUR? Then what’s the point of the change?
• Switched to new Portuguese currency, PTN? OK. PTN 20-year interest rates say 2% above those of EUR. So the banks’ loss is about ┚¬200mn. Loss today — fair value of PTN loan. Replicate across corporate loans and fixed-rate mortgages. Adios bank. Busting the banks just ain’t making Portugal richer.

My opinion: euro a very silly idea (see Dear Aunty letter dated 1997). But the door locks behind you: getting out would cost the equivalent of a Great Depression’s loss of output. Burning building or nay, the door is locked.

[uncle tom]

what’s the point of the change

The notion that one size can fit all is the great failing of the euro.

The issue is not the funding of multinationals, it's much more mundane.

Sovereign central banks need to be able to set interest rates that best suit their domestic circumstances, the everyday lives of their people.

When domestic economic circumstances change, they need to be able to act.

The creation of the euro was an act of gross arrogance - not, I think, ratified by a democratic referendum in any of the participating countries.

Arguments that there was insufficient economic concordance between the participants were countered with the argument that the very act of creating the currency would create that concordance.

Reckless is hardly the word!

While breaking out of the euro is not without difficulty, it CAN be done!

Tom

[DRT]

not, I think, ratified by a democratic referendum in any of the participating countries.

Tom,

For the love of God keep him on Economics and don't let him stray into electoral voting systems - don't say I didn't warn you.

Derek

[jdaw1]

what’s the point of the change

The notion that one size can fit all is the great failing of the euro.

The issue is not the funding of multinationals, it's much more mundane.

Sovereign central banks need to be able to set interest rates that best suit their domestic circumstances, the everyday lives of their people.

When domestic economic circumstances change, they need to be able to act.

All true. But the transition costs to an exit are enormous. Would cost Portugal the chunky end of eleven digits of lost output.

The creation of the euro was an act of gross arrogance - not, I think, ratified by a democratic referendum in any of the participating countries.

France had a referendum on the Maasticht treaty, on 20 Sept 1992, which — by an edge — came in over the line. (Had it been in metropolitan France only, would have lost, but the overseas départements were sufficiently in favour to get the total over 50%.) The Irish referendum was on 18 June 1992.

While breaking out of the euro is not without difficulty, it CAN be done!

At eye-watering cost. Way more than you seem to be thinking about. Like, an order of magnitude more than the current problem with mortgages.

[jdaw1]

For the love of God keep him on Economics and don't let him stray into electoral voting systems - don't say I didn't warn you.

Actually, for a Yes|No referendum, there are no complexities with electoral systems. Electoral systems get interesting when the number of choices exceeds two.

Though there is a moral question. If the Yes is permanent, and the No is changeable, should 50% be the required margin for a Yes?

[DRT]

For the love of God keep him on Economics and don't let him stray into electoral voting systems - don't say I didn't warn you.

Actually, for a Yes|No referendum, there are no complexities with electoral systems. Electoral systems get interesting when the number of choices exceeds two.

I did understand that at the point of posting the warning. I was just terrified that Tom would eventually stray into the more "interesting" world of wider choice electoral systems and thought it best to issue an early warning.

[g-man]

what’s the point of the change

While breaking out of the euro is not without difficulty, it CAN be done!

Tom

The simplest way is for portugal to create their own currency and give *ME* all their euros.

[RonnieRoots]

I must admit that I have no in-depth knowledge of the various points of view of EU countries on the Euro, but in general I think that countries like Portugal (and to a lesser extend Spain) have an enormous advantage of joining the Euro. Their former currency wasn't particularly trustworthy, opposed to e.g. the Guider and Deutch Mark, and there is no doubt that the Euro has eased international trade, both within and outside of the EU. There may be negative sentiments from groups of people (mostly about prices gone up), but these same people profit from the Euro as well (perhaps without realising it) everytime they go to another country and don't have to pay exchange fees for getting yet another currency.

I find it hard to believe that countries will change back to their own currencies. Not only because of the costs involved, but also because the benefit of doing so is very much unclear.

[uncle tom]

there is no doubt that the Euro has eased international trade

I think the Shippers' accountants might not agree - the currency's value is ruinous to their ability to turn a profit at the moment.

Tom

[RonnieRoots]

there is no doubt that the Euro has eased international trade

I think the Shippers' accountants might not agree - the currency's value is ruinous to their ability to turn a profit at the moment.

Tom

True, but that would also have been the case if they were still dealing in their old currency. The dollar would have gone down anyway in the current situation, euro or not.

[uncle tom]

France had a referendum on the Maasticht treaty, on 20 Sept 1992, which — by an edge — came in over the line. (Had it been in metropolitan France only, would have lost, but the overseas départements were sufficiently in favour to get the total over 50%.) The Irish referendum was on 18 June 1992.

OK, so only the Irish got a proper say on the matter.

But I don't understand why you think it would be financial hellfire and damnation to break away.

Ireland broke their link with sterling in 1979, with the result that their currency dropped around 10% in value. This increased competitiveness invigorated a long stagnant economy, and they have enjoyed a lasting boom.

Since joining the euro in 1999, they have followed the example of Spain and Portugal, gorging themselves on cheap money. However, this is now coming home to roost with a property crash - an uncontrolled boom leading to bust.

Their government is virtually powerless to control or manage the situation, and with only around 2% of the eurozone's population, theirs is a small and distant voice at the ECB

It's a dilemma the Irish will have to resolve for themselves. Their economy is on a stronger footing than many, with low levels of national debt.

With a small population there are obvious downsides to an independant currency, but the benefits of being able to fine tune one's economy to suit local needs are also very attractive.

Tom

[RonnieRoots]

Related to this, the GCC countries (aka the 'Gulf States') are planning a single currency as well. They're quite ambitious: the goal is to introduce the currency from 2010. Whether this currency will be pegged to the dollar (as is the case with the individual currencies at the moment) is still unclear. There have been debates here in Oman to cut the Omani Rial (OMR) loose from the dollar, or to widen the peg to 4-5 different currencies.