Elections money

Elections will take place in a number of EU countries this year. And interestingly enough, we will see those countries actively borrowing in the capital markets. Italy´s government will be number one. They intend to issue public debt bonds totaling € 271 billion. That´s a lot of money, to be paid by future governments and the younger people. France will be number two. They should be in market to borrow over €200 billion. Even Germany, with general elections later in the year, will be looking for fresh money in the financial markets: €160 billion.

The point here is to spend a lot on public goodies to get the voters happy and ready to support those in place. It´s short term politics against long term liabilities.

Puerto Rico´s money problems

Today we should look elsewhere. To the US, for instance as we get the news that Puerto Rico is also broke. The public debt is around USD 72 billion and the territory’s government is in no position to honour it. Default is around the corner. But it looks manageable as debt represents only 70% of nominal GDP. In any case, it will end up by causing some losses for those who have placed money in public bonds. That´s what they mean by “manageable”: the State borrows and with time the private citizens get a serious haircut. 

Sovereign nightmares

The New Year brings back the sovereign debt question as the most urgent issue for the EU member States. Now that it is clear that Greece and Ireland have reached unsustainable levels of debt, all the attentions are moving to Portugal. On Wednesday next week, Lisbon will be again in the market to try to place Treasury paper. There is deep anxiety in Brussels and other capitals about the investors' response to that move.

The Portuguese government has shown they prefer to pay very high rates of interest to making use of the EU/IMF financial facility. This option is politically expedient in the short run. It delays the moment for hard decisions, particularly at a time when the presidential elections are around the corner, on 23 January, and the government's candidate is lagging behind in the polls. But, sooner or later, the moment of truth will come. The poor performance of the country's economy will then hit the wall.