Sharing Wisdom (21 Feb 2012)
Sharing Wisdom (21 Feb 2012)
Sharing Wisdom (21 Feb 2012)
The reason for this is that Portugal's economy is shrinking faster than its debt. Apart from Greece, whose debt/GDP is 160 per cent, Spain and Italy are two other countries that could face the same problem as Portugal, despite adhering to the austerity/tax-raising measures prescribed by the EU and IMF. The problem is that without growth, reducing debt levels becomes almost impossible. It's likely to lead to even higher debts. This is because high unsustainable debt calls for a bailout, the bailors impose more austerity as a precondition to loosening their purse strings, then the austerity causes slower growth, which then accentuates the debt problem. Those who advocate austerity hope that cutting public expenditure will provide more room for more private investments, which are more productive. In this way, they think austerity may prove to be expansionary. Sceptics might - quite legitimately - argue that 'expansionary austerity' is an inherent contradiction in terms (much like 'airline food' or 'military intelligence') but semantics aside, it's difficult to see much improvement in Europe's finances over the next few months. This suggests there is plenty of scope for contrarians. Speaking of those who go against the flow, Bank of America-Merrill Lynch in its Feb 16 Global Economics Weekly said while everyone thinks the US economy is getting back on its feet, it thinks otherwise. 'While the consensus has shifted, we haven't,' said BOA-ML. 'We continue to argue that the recent improvement is due to a recovery from the oil and Japan shocks, but ultimately will be reversed by shocks in the second half this year. Moreover, in our view, recent news underscores, rather than undercuts, our forecast of a very weak second half.' Contrarians take note.