Too sad to watch

«(…) the agreement with Portugal, as laid out in the draft MoU, is overwhelming in scope. The implied message from the troika seems to be that the approach is failing in Greece and Ireland because it did not go far enough. (…)

More importantly, the agreement has serious issues of process and substance, of which four should be emphasized:

First, there is no discussion of the causes of this crisis, what led Portugal to this situation. It is like going to a doctor seriously ill, and coming back with no diagnosis of the illness but instead with 222 different prescriptions (…)

Moreover, given the sheer number of measures, there is no way that a future government, regardless of the party in power, will be able to fully meet the terms of the agreement. The government will likely miss several targets fairly early in the program and this will call its competence into question with its European Union partners, unnecessarily, but perhaps by design.

Second, the agreement does not ask nor respond to the question of who was responsible for what went wrong.(…)

Who are the largest debtors now unable to pay? Answer: in Portugal’s case, the government and the banks.(…)

Who are the largest creditors now afraid of not getting their money back? Answer: large banks and insurers in a number of countries and the Eurosystem (…) So these creditors also made mistakes.

Third, the agreement focuses on the minutiae, on far too many wishful thinking ideas in a cross-section of areas (…) The large number of measures precludes any serious attempt to evaluate their individual effectiveness. (…)

Finally, the policy measure with the largest economic impact is not correctly implemented. Specifically, in dealing with the Portuguese banks, whose combined liabilities represent 250% of GDP, the agreement does not adopt international best practice. (…) A strong and prompt bank resolution procedure would, among other things, impose losses on the creditors of failing banks and would force out failing banks’ management. Instead, the troika required the Portuguese taxpayer to further support the banking system with up to €47 billion (27.2% of GDP) between guarantees and capital increases.

Moreover, rather than replace failing banks’ management, following, for example, the practice of the US FDIC, the MoU (p.7) states that the capital increases “will be designed in way that preserves the control of the management of the banks by their non-state owners”. That is, the taxpayer will likely recapitalize the private banking system, in effect nationalizing it, and yet management control will remain with the old owners. (…)

The idea substantiated in the MoU that an entire country can be reengineered – notwithstanding its faults, the World’s 38th biggest economy – based on a 3-week 34-page outline is remarkable. The agreement seeks to reinvent the wheel and in the meantime destroy what does work. This treatment of Iceland, Hungary, Latvia, Greece, Ireland, and Portugal is beginning to seem like the West’s version of China’s Great Leap Forward: impossible targets based on but pure ideology. It is simply too sad to watch. » – Ricardo Cabral (The Portuguese Economy)