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Germany and France want Portugal to accept an international bailout as soon as possible in order to prevent its debt crisis spreading to other countries, German magazine Der Spiegel reported on Saturday.
Without citing its sources, the magazine said government experts from both European heavyweights were concerned Lisbon will soon not be able to finance its debt at reasonable rates, after its borrowing costs rose at the end of last year.
Berlin and Paris also want euro zone countries to publicly commit to do whatever it takes to protect the bloc's single currency, including topping up a 750 billion euro (623 billion pound) rescue fund if necessary.
Portugal is viewed by many economists as the peripheral euro zone country that is most likely to follow Ireland and Greece to seek an international bailout as it grapples to cut its debts and borrowing costs. It holds its first bond auction of the year next week.
“Despite the recent drama, we believe we have only seen the opening and second act, with the rest of the plot still evolving...There is no absolutely safe sovereigns."
"'both Japan and US public finances are unsustainable"
... former Bank of England policy maker & Citigroup Economist Willem Buiter
The team has published a note forecasting much more strife to come in the wake of Greece and Ireland's recent bail-outs and eurozone governments' borrowing costs hitting record highs.
"Despite the recent drama, we believe we have only seen the opening and second act, with the rest of the plot still evolving," the team wrote. "There is no absolutely safe sovereigns."
There are likely to be several sovereign debt restructurings in the next few years, the analysts said, with Portugal likely to need to access the emergency funding facilities soon.
Against this backdrop, the US and Japan - dubbed the "fiscal sustainability deniers" - cannot keep ignoring the question of how safe their public finances are, the team said.
The fears about default will encompass the two economies "before long", they argued - particularly if a default is defined not just as a failure to meet the debt contract, but also as inflicting severe losses on debt holders through deliberately-engineered inflation or weakening the currency.
"Both Japan and US public finances are unsustainable, in our view, and in the absence of credible and substantial fiscal tightening both would eventually face painful discipline through the markets," the economists wrote.
It is only a matter of time before the US will have to raise funds by issuing debt offering "significantly higher" returns to bondholders, to reflect the level of risk surrounding it, they added.
While the break-up of the eurozone was seen as very unlikely, the analysts believe there is a risk that a lagging member state could leave the monetary union "in a fit of populist and nationalist rage" if they do not get enough external support, despite the high costs of exiting the euro.
There is also a risk that if a weaker member seems to get too much financial help, a major player could depart "on a wave of domestic populist outrage" about having to fund bail-outs.
The economists called for a much bigger liquidity support facility and for a restructuring of the debt of the EU's failing banks and insolvent nations.
International Monetary Fund First Deputy Managing Director John Lipsky said U.S. government finances will present policy makers with a “major challenge” for years.
“The challenges facing U.S. public finances shouldn’t be underestimated,” Lipsky said during a conference panel discussion today on the U.S. role in the world economy. There is a “brief window of opportunity” for fiscal-policy adjustments, and “the U.S. needs to make the most of this window of opportunity.”
Treasury Secretary Timothy F. Geithner this week said lawmakers must raise the $14.29 trillion federal borrowing limit in the first quarter of 2011 or risk a default on U.S. debt. The U.S. had a $1.3 trillion budget deficit in fiscal year 2010, which ended Sept. 30. President Barack Obama’s debt-reduction panel failed last month to agree on recommendations for ways to reduce the annual deficit to about $400 billion in 2015.
“Fiscal adjustment is going to be one of the major challenges for U.S. policy makers for some time to come,” Lipsky said at the annual meeting of the Allied Social Science Associations in Denver. While “supportive fiscal and monetary policies” should remain in place for the near term to boost a “sluggish” recovery, they are leaving behind a “legacy of high debt,” he said.
U.S. employers added 103,000 jobs in December, fewer than the median projection of 150,000 in a Bloomberg News survey, Labor Department figures showed yesterday. The report affirmed Federal Reserve Chairman Ben S. Bernanke’s view that it could take “four to five more years” for the labor market to completely mend.
Portugal aims to raise euro1.25 billion ($1.64 billion) next week by auctioning off 3-year and 9-year bonds in a key test of investor confidence.
Borrowing rates edged up across much of the rest of Europe after a eurozone growth figure was revised down, but traders were by far most worried about Portugal -- its 10-year government bond yield spiked above 7.1 percent. The nervousness triggered a steep drop in Portuguese share prices. The Lisbon benchmark stock index closed down 3 percent, dragged lower by a sharp fall in shares in Portuguese banks which are exposed to national debt.
The Bank of Tokyo-Mitsubishi noted that whereas Ireland's loan maturity average is seven years at an average cost of 5.8 percent, Portugal's 7-year bonds are now trading at 6.6 percent.
Prime Minister Jose Socrates said Friday that state revenue was higher than forecast last year and spending was lower than expected, helping Portugal to meet its budget deficit target of 7.3 percent. Meanwhile, the economy is estimated to have grown by at least 1.3 percent in 2010.
Jobless rate that has risen to 11 percent.
Portugal is one of the 17-nation eurozone's smaller members, accounting for less than 2 percent of the bloc's gross domestic product. But its difficulties could stoke the continent's debt crisis, especially by placing pressure on its much larger neighbor Spain, which also has debt problems.
Rumours swept international markets yesterday that some banks were no longer prepared to accept Portuguese government bonds as collateral against lending. The simmering tensions could come to the boil as soon as Wednesday next week, when Portugal hopes to raise up to €1.25bn through a bond issue. Any failure to get the auction away would trigger a new panic about the ability of the EU's most indebted nations to stay on top of their borrowings. And while Portugal is a relatively minor eurozone member in economic terms, accounting for just 2 per cent of the bloc's GDP, turmoil could trigger a crisis in its next-door neighbour Spain, which would be much harder to contain.
"The European governments have to fulfil their duties in full: monetary policy cannot substitute for government irresponsibility. Europe cannot afford to rest halfway. We need to be more ambitious. The proposals we have seen in Brussels do not go far enough in the ECB's view."
Jean-Claude Trichet - President ECB
The anxiety was heightened yesterday by official data revealing that the eurozone's economic recovery during the second half of last year had not been as strong as previously thought. The eurozone economy grew by 0.3 per cent during the third quarter of 2010, the EU said, rather than 0.4 per cent as it had previously recorded.
The December jobs report turns recent history on its head. We’ve been used to healthy increases in employment making no dent in the unemployment rate, but this time a mediocre jobs figure—just 103,000 new jobs were created—coincides with a gratifyingly large fall in unemployment, to 9.4% from 9.8%. For those keeping track at home, that’s employment up by 103,000 and unemployment down by a whopping 556,000.
There’s no doubt that the headline payrolls number is a disappointment. The economy just doesn’t seem to be creating jobs: we need to see 150,000 new jobs a month just to keep pace with population growth. But is there some good news, at least, on the unemployment front?
I’m not sure. While unemployment is down from both December 2009 and December 2010, it’s down only for those who have been out of work for less than 26 weeks. The ranks of the long-term unemployed are still rising:
Meanwhile, the numbers of “discouraged” people continue to rise very fast indeed: these are the people who’d love a job but have given up looking for one and therefore don’t count as unemployed.
Among the marginally attached, there were 1.3 million discouraged workers in December, an increase of 389,000 from December 2009. Discouraged workers are persons not currently looking for work because they believe no jobs are available for them.
The headline unemployment rate is important, and it’s great that it’s coming down. But if you’ve been out of work a long time, there’s little hope in these figures for you.