Mike Shedlock

Most attention lately has been on Cyprus, Spain, and Italy. Long-time troubles have been brewing in Portugal and I have an update coming up shortly.

First consider Underwater: The Netherlands Falls Prey to Economic Crisis.

The Netherlands, Berlin's most important ally in pushing for greater budgetary discipline in Europe, has fallen into an economic crisis itself. The once exemplary economy is suffering from huge debts and a burst real estate bubble, which has stalled growth and endangered jobs.

"Underwater" is a good description of the crisis in a country where large parts of the territory are below sea level. Ironically, the Netherlands, widely viewed as a model economy, is facing the kind of real estate crisis that has only affected the United States and Spain until now. Banks in the Netherlands have also pumped billions upon billions in loans into the private and commercial real estate market since the 1990s, without ensuring that borrowers had sufficient collateral.

Private homebuyers, for example, could easily find banks to finance more than 100 percent of a property's price. "You could readily obtain a loan for five times your annual salary," says Scheepens, "and all that without a cent of equity." This was only possible because property owners were able to fully deduct mortgage interest from their taxes.

Instead of paying off the loans, borrowers normally put some of the money into an investment fund, month after month, hoping for a profit. The money was to be used eventually to pay off the loan, at least in part. But it quickly became customary to expect the value of a given property to increase substantially. Many Dutch savers expected that the resale of their homes would generate enough money to pay off the loans, along with a healthy profit.

No nation in the euro zone is as deeply in debt as the Netherlands, where banks have a total of about €650 billion in mortgage loans on their books.

Consumer debt amounts to about 250 percent of available income. By comparison, in 2011 even the Spaniards only reached a debt ratio of 125 percent.

The Netherlands is still one of the most competitive countries in the European Union, but now that the real estate bubble has burst, it threatens to take down the entire economy with it. Unemployment is on the rise, consumption is down and growth has come to a standstill. Despite tough austerity measures, this year the government in The Hague will violate the EU deficit criterion, which forbid new borrowing of more than 3 percent of gross domestic product (GDP).

It's a heavy burden, especially for Dutch Finance Minister Jeroen Dijsselbloem, who is also the new head of the Euro Group, and now finds himself in the unexpected role of being both a watchdog for the monetary union and a crisis candidate.

Even €46 billion in austerity measures are apparently not enough to remain within the EU debt limit. Although Dijsselbloem has announced another €4.3 billion in cuts in public service and healthcare, they will only take effect in 2014.

Today is a flight day. Will be back to more normal posting Sunday evening.

Portugal Considers Paying Workers in T-Bills to Circumvent Court Ruling that Austerity Measures are Unconstitutional

Last week, ahead of a ruling by the Portuguese Constitutional Court on whether or not the austerity measures it approved were legal, Portugal's PSI stock market took a dive.

PSI Stock Index



On March 25 the index was at 6023. It closed at 5637 on April 5 a decline of 6.4%

Court Rejects Budget

On April 5, Portugal constitutional court rejects budget articles

Portugal's Constitutional Court has ruled several key articles of the 2013 state budget unconstitutional.

It rejected four out of nine contested austerity measures from the budget.

It will deprive the state of some 1.5bn euros (£1.3bn) in savings the government had said were necessary to meet the terms of a eurozone bailout.

The court rejected a measure to scrap summer holiday bonuses for public sector workers and pensioners, as well as cuts to unemployment and sickness benefits.

Prime Minister Pedro Passos Coelho did not react to the decision immediately but called an extraordinary cabinet meeting for Saturday.

For most Portuguese workers, the annual tax rises are equivalent to more than a month's wages. The standard income tax rate is rising from 24.5% to 28.5%.

The savings are Portugal's toughest in living memory, aimed at meeting the terms of a 78bn-euro (£64bn) bailout.
Portugal Considers Paying Workers in T-Bills

One might think the Portuguese government would have gotten the message or at least the spirit of the message but one would be wrong.

The Wall Street Journal reports Portugal Mulls Paying Workers in T-Bills as a means to circumvent the court ruling.
The Portuguese government is considering a plan to pay public workers and pensioners one month of their salary in treasury bills rather than cash after a high court ruled out wage cuts, a person familiar with the situation said Sunday.

The Portuguese government warned Saturday that the court's decision will put into question the country's ability to fulfill its €78 billion ($101 billion) international bailout program.

Specifically, the court rejected plans to cut one of the 14 paychecks that public workers usually get each year and to slash 6.4% from pensions for retirees.

By paying one month of salary in T-bills to public workers and pensioners, the government would save an estimated €1.1 billion in expenses, narrowing the budget gap significantly

Plan "C" Coming Up

The idea that paying workers in T-Bills (debt) can fulfill austerity agreements is of course preposterous. I highly doubt Brussels will go along with this scheme, and if so Portugal will soon be back at the drawing board. Plan "C" is coming up.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com


Mike Shedlock

Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.
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