The noose tightens around Portugal

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After recent cuts in GDP growth from Europe due in part to austerity, or at least the threat of it, in many of the 17 nations it wasn’t really a surprise when it was reported last night that the PMI has fallen into contraction:

Europe’s manufacturing industry contracted more than initially estimated in August, adding to signs that the euro region’s recovery is faltering.

A manufacturing gauge based on a survey of purchasing managers in the 17-nation euro region fell to 49 from 50.4 in July, London-based Markit Economics said today. That’s the weakest in two years and below an initial estimate of 49.7 published on Aug. 23. A reading below 50 indicates contraction.

Europe’s economy is cooling as governments toughen spending cuts to narrow their budget deficits, sapping consumers’ willingness to spend. European economic confidence slumped the most in almost three years in August. In China, manufacturing growth remained near a 29-month low last month and manufacturing in South Korea and Taiwan contracted, highlighting signs of a worsening global slowdown.

“The euro zone is clearly struggling in the face of tighter fiscal policy across the region,” said Howard Archer, chief economist at IHS Global Insight in London. “Slower global growth has clearly hit foreign demand for goods and services pretty hard.”

The strangulation of Greece continues, with another announcement last night that their economy continues to fail under austerity:

Greece faces more demands for fiscal tightening as senior government officials acknowledge that the country is likely to overshoot limits set on its budget deficit this year.

Greece’s deficit could exceed 8.5% of gross domestic product, compared with an official forecast for 7.6%, as the government struggles to meet revenue goals, two senior Greek government officials said Thursday.

The deficit is now estimated at “around 8.5%, or a bit higher. Tax collection remains the main problem,” one of the officials told Dow Jones Newswires. “Many simply don’t have the money to pay taxes. We have to get the economy going but the austerity is holding everything back.”

Greek Finance Minister Evangelos Venizelos already has publicly acknowledged that Greece’s economic recession is likely to cause the government to overshoot its deficit forecast this year.

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What is most interesting about this is that the Greeks are now reporting that they can’t meet the defined targets because of austerity, but their punishment for not doing so is just more of the same medicine that is slowly killing them:

Missed budget targets and the impact of harsh austerity measures on the economy will be at the center of Greece’s talks in Athens this week and next with representatives of the European Union, the International Monetary Fund and the European Central Bank. The so-called troika is to assess Greece’s eligibility for the next tranche of aid in a decision expected by mid-September.

EU and Greek officials don’t see much danger of the troika withholding the next installment of Greece’s 2010 bailout package because of economic headwinds. But the missed budget target will fuel the debate over whether still more spending cuts and taxes will allow Greece to emerge from a three-year recession next year.

A higher-than-expected deficit is likely to force the Greek government to introduce further austerity measures to cover the budgetary shortfall, in a move that would further harm disposable income amid a shrinking economy.

“I think there will be some understanding from the troika because of the higher-than-expected recession, which is partly due to the austerity measures they imposed. I think this will be mentioned in their report, but they will ask for more measures. I have no doubt about that,” a second Greek government official said.

It would be the second year in a row that Greece has failed to meet the deficit targets agreed with the country’s international creditors.

Overnight the Dutch Finance minister announced yet another meeting to attempt to deal with the collateral issue around the current Greek bailout funding. What is most interesting about this is the fact that the Dutch Finance Minister is reportedly referring to the squabbling over collateral as “the crisis”, when in fact it is a sideshow of a sideshow to the actual crisis:

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The German, Dutch and Finnish finance ministers will meet on Sept. 6 in Berlin to discuss the euro-area debt crisis as a Finnish demand for collateral threatens to delay a second Greek bailout.

“We will discuss how to go forward with this crisis and the future,” Dutch Finance Minister Jan Kees de Jager told reporters in The Hague today. “It’s about fighting this fire, but more importantly, how do we prevent such a fire.”

Finland’s demand for collateral from Greece as a condition for contributing to a second rescue package has triggered calls for similar treatment from countries including Austria and the Netherlands. De Jager said an agreement on collateral shouldn’t take long to reach.

“I see room for a solution; there are proposals on the table to discuss,” De Jager said. “I think it will be possible to provide equal treatment for creditors without the disadvantage of the proposed deal between Finland and Greece, which is unthinkable because it uses extra money from the EFSF to provide collateral to Finland.”

Given that it is now very obvious that Greece is not going to meet its targets, and every time it tries to get there by tightening, those targets moves further away, you would have thought that Portugal, the next cab of the rank, would have learned something from this. But I guess I was wrong:

Portugal’s government outlined Wednesday a slew of new austerity measures for 2012 to control its accounts, increasing pressure on an economy already in contraction but putting the country close to a budget balance by 2015.

“Budget consolidation and a cut in external dependency are unavoidable,” Finance Minister Vitor Gaspar said. Without providing details, Mr. Gaspar said the Portuguese should expect to pay more taxes next year, including sales taxes. Higher earners should also see their income tax rise, and companies with higher profits will also pay more, he said. The government will sharply cut public spending, including job cuts and the restructuring of the country’s central administration.

Portugal’s goal is to almost eliminate its budget deficit by 2015, from 9.1% last year. Under a €78 billion ($112.65 billion) international bailout the country received in May, it must cut its deficit to 5.9% this year, 4.5% next year and 3% in 2013.

Mr. Gaspar reiterated that the government expects the economy to contract 2.3% this year and 1.7% next year. GDP growth of 1.2% is expected for 2013. Unemployment should reach its peak next year at 13.2%.

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It all sounds so familiar. I spoke about the Portuguese situation back in April and since then I haven’t seen anything to give me hope that Portugal isn’t once again making exactly the same mistakes that Greece did. A quick look at Portugal’s finances (available here ) shows pretty clearly that what has happened to Greece is going to happen to Portugal. They are simply another net importer, with a large interest bill to the rest of the world and an indebted private sector. If they are not focusing on improving their overall national productivity and competitiveness then cuts in government spending will simply force the private sector to contract because it has no savings buffer to compensate for the loss of income. This new round of tightening is an admission that Portugal now expects to miss its own self-imposed targets so they , like Greece, are going down the road of additional austerity. When the rest of Europe is now also heading for contraction the outcome seems almost inevitable.