Another week, another round of austerity – and another bail-out of the banks in Europe.
Greece’s parliament this week passed austerity measures linked to the receipt of crucial bailout funds to prevent the government from defaulting by mid-July. Two bills authorized a Euros 78 billion (£70 billion) package of budget cuts and asset sales. Under the terms of the new austerity plan, prime minister George Papandreou has pledged a Euros 50 billion (£45 billion) privatisation programme and the imposition of levies ranging from 1 percent to 5 percent on wages. Tax increases will hit the lowest-income families as the tax-free threshold is cut to euros 8,000 (£7,227) , from Euros 12,000 presently. He also plans higher taxes on restaurants and bars, higher heating-oil taxes.
Greek newspaper To Vima calculated the additional burden for an average family of four at Euros 2,795 (£2,525) a year, about the same as one month’s income.
In Portugal, the new right-wing Social Democrat party led coalition government (it has just taken over with a comfortable majority) passed an austerity programme this week in parliament more even more stringent than the Socialist government’s plan for spending cuts the Social Democrats rejected while in opposition. The socialists, now the main opposition party, offered no objections that required a vote. The previous minority Socialist government collapsed in March after failing to pass austerity legislation. Shortly after, Portugal followed Greece and Ireland in seeking a bailout.
In line with the demands of the European Union and the International Monetary Fund, who offered Euros 78 billion (£70 billion) in rescue loans, the four-year programme calls for raising value-added tax on some goods and reducing social security contributions by companies. The government will also privatise and sell stakes in state-owned companies such as the EDP utility and REN power grid operator later this year. It will also sell the TAP airline, a public television channel and the insurance arm of state-run bank CGD. It is also postponing a high-speed rail link between Lisbon and Madrid.
Most controversial for the ordinary Portuguese is the government’s decision to slap a one-off levy on year-end salary ‘bonuses’ in 2011. The government is also preparing plans to cap public servants’ pensions, cut back severance payments to workers and other regressive reforms the social security system.
These massive spending cuts and privatisation programme came soon after, on 24 June, the Socialist government of Portugal’s neighbour, Spain, unveiled a new round of spending cuts. There will be a 3.8 per cent reduction for next year’s budget and a budget cap of Euros 117.4 billion (£106 billion). The Government of prime minister Jose Luis Rodriguez Zapatero has now set in train measures to reduce the power of trade unions in wage negotiations and the partial privatisations of the state lottery and airport authority.
Italy’s Government approved on Thursday 30 June a Euros 47 billion (£42 billion) package, designed to allow the country to balance its budget by 2014, according to billionaire premier Silvio Berlusconi. The plan focuses on reducing corporate taxes tracking down tax evaders and freezing salaries of public employees. Cuts will also hit support to renewable energy sector for a country highly dependent on energy imports and which has just rejected in a nationwide referendum nuclear power. The plan has still to go through parliament, but Berlusconi is expected to achieve this with his (thin) majority.
Is the sacrifice worth it?
European Commission President José Manuel Barroso and European Council President Herman Van Rompuy were pleased with the passage of Greece’s austerity bills. They said in a joint statement that it was a
“decisive step Greece needed to take in order to return to a sustainable path. In very difficult circumstances, it was another act of national responsibility.”
But the money men, took a different view. Ben May, European economist at Capital Economics Ltd. told Bloomberg
“We still expect government debt to remain stubbornly high over the coming years, suggesting that the [Greek] government may still be unable to borrow from the markets when any bailout package ends…The upshot is that any market rally in response to the government’s victory may prove to be fairly short-lived.”
US based ratings agency Standard & Poor’s called the plans for Italy, which has the largest public debt in the EU, “credible”. But it said the size of the package was too small to make a big difference, and it said the package might have also overestimated the impact that a series of measures aimed at drawing money from tax evaders. It said there was a
“one in three” chance that Italy would see its debt downgraded from its current A+ status within 24 months. A lower debt rating would require the country to pay more to make its bonds attractive, further adding to the government’s debt level.
Ian Spreadbury from investment fund Fidelity told the Financial Times that Spain would be the “litmus test” for the stability of countries on the European periphery, while Luke Stellini from another investment fund Invesco Perpetual warned Portugal would be next to require debt restructuring. Mr Spreadbury said:
“While Europe, and in particular German and French banks, may be able to absorb losses from a Greek default, wider contagion could create a much larger problem.”
According to this report, investors (as indicated by the spreads on Credit Default Swaps, a measure of the cost of insuring debt against default), gave
Greece an 80 per cent chance of default on Thursday, in spite of the successful passing of austerity measures. Portugal was the next worst with a 48 per cent chance of default, while the likelihood of Ireland defaulting was 47 per cent. Spain’s default likelihood was 21.5 per cent.
For now though, there are some who have reasons for cheer.
As the Financial Times points out, with the markets having ‘dropped sharply’ in the run up to the Greek vote on Thursday, “there was relief that disaster had been averted” with European stocks ending the week up 4 per cent… ‘But,’ it continued, ‘arguably more important was the rollover proposal, which gained quick support from both French and German banks.’
The French ‘rollover’ proposal, unveiled last week, is designed to ensure that investors “take some pain over Greece..it is an attempt by banks to embrace burden-sharing, but on their own terms’
For fund managers and analysts, ‘banks are the relative winners of the scheme while Greece and other European governments are the losers.’ Or, as Michael Cembalest, global head of investment strategy at JPMorgan Asset Management, tells the FT.
“The plan is mostly designed to continue transfers from the European Union taxpayers and the International Monetary Fund [editor’s note: whose funds derive from taxpayers, via their governments] to French and German banks…”