Portugal fights for scraps of credibility, US plans indefinite debt

An option of last resort - that's how Portugal’s Prime Minister has described the country's request for a financial bail-out from the EU.

­Analysts say the worst-case scenario for the country, long been predicted, may be looming.

It's estimated that the rescue plan will top $US 100 billion, with anger set to spread around Europe over other EU taxpayers having to pick up the bill.

The country has long resisted taking a bailout, as Greece and Ireland did before.

This may soon exhaust the patience of investors and plunge the global economy into further trouble, according to Karl Denninger of the Market Ticker.

“The first question one has to ask is where is the credibility behind the projections of both the EU and the US? We have heard of stress-tests, we were told that everything was OK; the banks were turning around and buying this debt thinking that they were going to be backstopped and now, all of a sudden, Portugal is not OK and as recently as a week ago we were told they were not going to need a bailout,” as Denninger displays the situation, recalling that the situation with bailouts of the EU member states is repeating itself for the third time, and it looks like this time the markets are going to say that enough is enough.

Karl Denninger believes that Wall Street is not responsible for the new economic black hole called Portugal per se, as it was in the situation with Greece, with allegations connecting it to Wall Street derivatives.  In any event, “we will never get to the bottom of it”, Denninger says.

“Portugal is just simply a matter of spending more than making, which is exactly what the US is doing as well, and finally people are throwing up their hands saying “we do not think we’re going to get paid” – and that is where the problem comes from.”

The primary thing to consider, according to Denninger, is credibility, because in the end this is the only thing an entity has, no matter whether it is an individual, a business or a government. Once lost, it is very hard to get it back.

The world economy has pretended it can deal the various manifestations of the global crisis for four years already but “all that has happened is our deficit has skyrocketed”.

The US with its astronomical deficit undoubtedly has a longer leash than Portugal or Spain but even theirs is not infinite.

“The lawmakers in Washington seem to have this idea that they can continue to play this game on an indefinite basis,” Denninger reveals.

“There is a line in the sand beyond which international investors in particular are going to throw their hands up and say “we just not going to deal with that any more” and then the Federal Reserve is left with only bad choices.”

­Market analyst and author Michael Mross says Portugal’s inability to meet its debt payment obligations was to be expected as such situations were “programmed with the introduction of the euro.” Portugal’s request for a $100 billion bail-out brings forward another issue: where should this money come from? There is no one in Europe, who has saved such a vast sum and is now able to spend it, says Mross.

Bankruptcy must be allowed not only for banks, but also for countries,” thinks Mross. “As long as you don’t allow bankruptcy, the whole system is ill and has no chance to survive. You can’t bail out forever. At one time everybody will be bankrupt.”

Germany cannot support other EU countries indefinitely, points out Mross. Berlin might want to pull out of the EU, which will mean the end of the euro as such. 

If Germany pulls out, the debts of the others remaining in the union will be devalued – and this is what they really need,” says Mross. “But on the other hand, you have the political world. If the euro fails, Brussels will lose its power and they don’t want this to happen at any cost. We will see how long it will last. Many here say that the euro might be going on for one or two years more.”

­Jon Gaunt, the EU referendum campaigner, says the euro is crashing.
 Many British people do not understand why their government is providing Portugal or Ireland with million-dollar bail-outs, when the probability of ever getting the money back is minute, according to Gaunt.

He also remarks that almost 50 per cent of Germans wish they could return to the Deutschmark, not to mention other EU nations who are tired of sponsoring Greece and Spain.

We [the UK] are paying £48 million to Europe, so for every £2.60 we put in we only get £1 back,” says Gaunt. “75 per cent of people in a recent EU referendum campaign said they wanted to get out of this expensive, undemocratic club.”

In such hard times, charity should start at home, concludes Gaunt.