from Jeremy Warner in the telegraph…

One of the effects of relatively high inflation is to ease the burden of debt by reducing its real value. For a highly indebted nation such as Britain, inflation therefore seems to make sense as an economic strategy.

With no control over their own monetary policy, the Portuguese and other fiscally-challenged eurozone nations don’t have that luxury. Without inflation to do the work for them, the austerity required to get public debt under control becomes that much greater, which is one of the reasons why Portugal will soon be following Greece and Ireland into seeking a bail-out. Britain, by contrast, gets a relatively pain-free way out of the mire.

That’s the conventional wisdom, anyway, but it is also largely rubbish. Wednesday’s analysis of the public finances by the Office for Budget Responsibility provides further evidence of why elevated inflation can never be economically benign.

Three powerfully negative effects are identified by the OBR. As a result of higher than expected inflation, living standards will fall for longer than previously anticipated, public borrowing will end up higher, and real terms cuts in public spending will have to be deeper.

So adverse are the consequences that the Government may have to abandon its commitment to real increases in health spending over the Parliament.
Related Articles

Using the OBR numbers, the Institute for Fiscal Studies calculates that in fact real spending on the National Health Service will fall by 0.9pc unless the Government tops it up from somewhere else. In the round, the public spending cuts will have to be £4bn deeper, while borrowing will end up £46bn higher. So much for inflating away the nation’s debts.

The cause of this phenomenon is obvious when you think about it. Large elements of spending, including benefits and the costs of servicing index linked gilts, will continue to rise in line with inflation, but because earnings are lagging prices, there will be a shortfall on the revenue side of the ledger, thereby increasing the amount the Government has to borrow.

Similarly, higher inflation – but no change to the cash size of departmental spending limits means that the real size of the cuts will be bigger.

One of the biggest shockers from the detail of Thursday’s OBR assessment is the escalating amount of money going straight down the drain of debt servicing costs. As public debt rises, these payments rise from £30.9bn last year to £66.8bn in 2015/16, or from 4.6pc to 8.8pc of all government spending.

Worse, these numbers are an understatement of the true position. According to data aired at a Taxpayers’ Alliance seminar on Thursday, once private finance initiative payments, public sector pensions and other off-balance sheet liabilities are taken into account, the true size of the interest bill will be more like £200bn by the end of the Parliament. I won’t trouble you with the projected costs of social security and tax credits, but they are little less alarming.

Against this backdrop of rising expenditure, Ed Balls, the shadow chancellor, accuses the Government of putting the economy “back in the danger zone” by seeking to apply at least a degree of restraint. Mr Balls is much more highly qualified in economics than I am, but he obviously understands nothing about the basic principles of finance.

The miracle is that the bond markets remain as compliant as they are given this toxic mix of inflation and continued public indebtedness. Moody’s reaffirmed the UK’s triple A rating on Thursday, but it warned inflation posed a significant risk. They can say that again. There must come a point when the gilts market turns. What higher interest rates would do to that £200bn debt servicing bill scarcely bears thinking about.

The growth forecasts are precarious enough as it is without the hammer blow to the public finances and the wider economy that higher borrowing costs would deliver.

this time from Bill Bonner in the Daily Reckoning…

Another thing taking a beating today is Europe’s periphery debt after the Portuguese voted against austerity. To put this into perspective, there are only two ways to go. When you borrow too much money from the future, you either have to pay it back or you go broke. The Portuguese were trying to pay down their debts, by cutting “services.” But it’s harder to cut services than you might think. Modern democratic welfare states are built on a fraud — that the government can give people more in services than they pay for. Typically, the government takes the extra money from groups that are politically weak — such as the next generation, which doesn’t get a vote.

Citizens don’t like it when the government tries to cut back. And when a majority of voters are on the taking end of the exchange — getting more from the feds than they pay in taxes — it’s very hard (maybe impossible) to impose “austerity” measures.

What the Portuguese election is telling us is that many governments will go broke before they pay down their debt. At least, that’s what it implies…

from Peter Oborne writing in the Telegraph…

Some European countries are in the habit of going bankrupt

A few hours after George Osborne’s faintly banal Budget speech, José Sócrates, the Portuguese prime minister, resigned. So far as I know, these two events were not in any way connected. Nevertheless, it is a very good bet that this little Iberian drama will have far more effect on British household finances and our national prosperity over the coming year than the Osborne Budget.

The resignation plunges the eurozone into a crisis it cannot survive. Mr Socrates’s failure to force his austerity package through the Portuguese parliament marks a crucial turning point.

It is the moment when the peripheral eurozone countries refuse to take orders any more from the centre. Effectively, Portugal has adopted blackmail as an economic strategy – and very effective it is, too.
The country is ready to be bailed out of its chronic financial mess, but only on its own terms. Otherwise it has a deadly card to play. It has the option of going bankrupt, an act of naked malice which would set in motion a second round of the banking crisis which began in 2007.

The consequences of this would be terrible: the break-up of the euro, mass unemployment, financial collapse, social despair. The scary truth is that the scale of the problem facing the eurozone has been gravely underestimated by British commentators. The reasons are shaming. One significant factor is the financial and economic illiteracy of political journalists and foreign correspondents. Too many are ill-equipped to look behind the bland statements made by European chancellors or to interpret the deliberately misleading balance sheets of major European banks.

This problem is exacerbated by the fact that almost all leading financial journalists share the moral and emotional commitment the European political class has long felt for the euro. The Financial Times, for example, has been a passionate supporter of the single currency since its inception, a pathology which runs so deep that its chief political columnist recently dedicated a column to making the extraordinary argument that the British economy would have been better off if we had joined the euro when it was first introduced.

But the most important problem is the failure to study history. Here the facts are devastating, and bear repetition. Portugal has defaulted on its national debt five times since 1800, Greece five times, Spain no less than seven times (and 13 times in all since 1500).

By contrast, Anglo-Saxon countries rarely, if ever, default. In this country, we haven’t reneged on our debts in nearly 1,000 years, though there have been close shaves. The same applies to Canada, Australia and the United States.

Many European countries are culturally attuned to bankruptcy. Indeed, Greece has spent approximately half of the 182 years since it achieved independence from the Ottoman Empire in a state of default and therefore denied access to international capital markets – a position it is likely to resume in the very near future.

The importance of these statistics is very great. They show that the widespread assumption by bureaucrats, senior politicians and commentators alike that eurozone countries could never go bankrupt is simply wrong.

In fact, the opposite is the case. The normal and indeed the automatic response of Spain, Portugal, Greece and many other European countries to major financial crises such as the one we are living through today has been to renege on their debts. So it would be extraordinary were they not to do so. History also shows that currency unions such as the eurozone invariably fail: the most relevant case in point is the Latin monetary union formed by France, Belgium, Italy and Switzerland in 1865, with Spain and Greece joining a few years later. Once again, these failures are invariably sparked by grand financial crises of the kind the world faces today.

These historical facts make contemporary European political discourse completely baffling. It is universally assumed by members of the European political class that the single currency cannot possibly fail because the political will to make the venture succeed is so powerful. There is no doubt about the will: French president Nicolas Sarkozy announced this year at the World Economic Forum in Davos that he and Angela Merkel, the German Chancellor, will “never, never… turn our backs on the euro… We will never let the euro go or be destroyed.”

Sarkozy and Merkel are dreaming. They are out of their depth, struggling against forces they cannot control and which will in due course wash them away. It is economic reality, not political speeches, that will determine the success or failure of the single currency, and the facts on the ground are so devastating that it is hard to see a way forward.

The experiment of imposing a single currency and a single monetary policy upon economies as divergent as those of Germany and Greece has gone tragically wrong. Germany, bolstered by an artificially low exchange rate and rock-bottom interest rates, is enjoying a boom. But the economies of Ireland, Portugal, Greece and others are being destroyed – businesses closing, unemployment surging, dependent on bailouts, all self-respect and independence gone.

It cannot be emphasised too strongly that were these countries outside the eurozone, there would be no real problem. The IMF could intervene, reschedule their debts and allow the national currencies to float until they reached a competitive level. In the case of Greece, this level would be well under half where it stands today as a member of the euro.

In the very short term, all is well. Portugal will get its bailout: the European Central Bank and its German paymasters have no choice if they are to avoid catastrophe. But it is now impossible that in the medium term the eurozone can survive intact, and increasingly likely that its collapse will be accompanied by a fresh banking crisis that will throw the entire Continent into another crippling recession, in all likelihood far more devastating than the one from which we have just emerged.

Ten years ago, William Hague, then Tory leader, forecast with astonishing precision the predicament that faces the 17 eurozone states today. He compared membership of the euro to being stuck in a burning building with no exits.

Luckily, we do not find ourselves in that position. But houses are already blazing in the next street, and Britain urgently needs to take steps to protect itself. First, and least important, we must minimise our financial commitments to the eurozone. It now looks certain that Britain will be legally obliged to make a very significant financial contribution when the Portuguese bailout comes. This is as a result of the reckless commitment made by former chancellor Alistair Darling in the dying days of the Brown government. Sadly, there seems no way out of this.

More importantly, however, we can take steps to reduce our national exposure to European sovereign debt, much of which is likely to become valueless. George Osborne controls two banks, RBS and Lloyds TSB, a legacy of the 2007 crisis. He needs to prune their balance sheets. Individuals, too, can play their part. Depositors should be chary of placing more than £50,000, the maximum insured by the state, on deposit with Santander (which owns what used to be the Abbey National and Bradford & Bingley). Santander is Spain’s best-run bank by some distance. But we are entering terrifying times, and there is no need at all to take unnecessary risks.

Portugal’s prime minister resigned on Wednesday evening after losing a confidence vote on austerity measures in a move that threw Portugal into political crisis and raised the likelihood of it seeking an international bail-out.

Jose Socrates was driven to quit his post after failing to win parliamentary support for the latest austerity package, the fourth and most severe put forward by the minority government in less than a year.

“This crisis occurs in the worst possible moment for Portugal,” Mr Socrates said on the steps of Belem Palace in Lisbon after tendering his resignation to the nation’s president Anibal Cavaco Silva.

“Today every opposition party rejected the measures proposed by the government to prevent Portugal being forced to resort to external aid,” Mr Socrates, who has led a minority government since 2009, said in a televised address.

The main opposition centre-right Social Democratic Party (PSD) had allowed past austerity plans to pass by abstaining from voting. But last minute negotiations failed to garner support and the government was only able to count on the vote of 97 members in the 230-seat parliament.

Despite the government warning that rejection of the austerity package would push Portugal closer to seeking a bail-out the opposition refused to accept further tax increases and cuts to social spending arguing that it hit the most vulnerable members of society.

“This crisis will have very serious consequences in terms of the confidence Portugal needs to enjoy with institutions and financial markets,” Socrates said.

“So from now on it is those who provoked it who will be responsible for its consequences,” he added.

The events in Lisbon came on the eve of a two-day EU summit, a meeting aimed at repairing the damage done to the euro by Irish and Greek bailouts last year.

An election in Portugal could not occur before 55 days, according to parliamentary rules, raising additional fears that Mr Socrates – who will head a caretaker administration with limited powers in the interim – will be unable to prevent a full collapse in market confidence.

President Silva said in a statement he will meet with all political parties on Friday to decide the way forward.

Portugal’s government is on the verge of collapse after opposition parties withdrew their support for another round of austerity policies aimed at averting a financial bailout.

The expected defeat of the minority government’s latest spending plans in a parliamentary vote Wednesday will likely force its resignation and could stall national and European efforts to deal with the continent’s protracted debt crisis.

The vote comes on the eve of a two-day European Union summit where policymakers are hoping to take new steps to restore investor faith in the fiscal soundness of the 17-nation eurozone, including Portugal.

The governing Socialist Party’s parliamentary leader Francisco Assis made an 11th-hour appeal for opposition rivals to negotiate changes to the latest austerity package and ensure the government’s survival. Prime Minister Jose Socrates, who heads the government, has said he will no longer be able to run the country if the package is rejected.

But opposition parties say the center-left government’s latest austerity plan goes too far because it hurts the weaker sections of society, especially pensioners who will pay more tax. The package also introduces further hikes in personal income and corporate tax, broadens previous welfare cuts and raises public transport fares.

The leader of the main opposition center-right Social Democratic Party, Pedro Passos Coelho, said late Monday that the political deadlock made an early election “inevitable.”

As in Greece, the austerity policies have prompted numerous strikes, with train engineers set to walk off the job during the morning commute Wednesday.

Portugal’s plight stems from a decade of miserly growth. While growing at the tepid rate of 1 percent a year, it ran up debt to finance its western European lifestyle.
Bloomberg reports Portugal Faces Lawmaker Vote Threatening to Push Toward Election, Bailout

Portuguese Prime Minister Jose Socrates will today face a vote in parliament against his deficit-cutting plan which threatens to push the country toward early elections and the need for a European Union bailout.

Lawmakers will discuss the government’s so-called stability and growth program of austerity measures at 3 p.m. in Lisbon. The opposition Social Democratic and Communist parties both pledged yesterday to table resolutions against the plan.

“If parliament decides on a motion against the stability and growth program, that means the government is not in a condition to make commitments internationally,” Socrates said on March 15. “That would mean a political crisis. In my understanding, the consequence of a political crisis is the worsening of the financing risks of our economy and would lead Portugal to request external intervention.”

Portugal is going to fail. Wednesday is as good a day to do it as any.

Thus, sooner, rather than later, another bailout is coming. However, it will not be Portugal who is bailed out, but rather German, French, and UK bank that lent money to Portugal.

Eventually Greece, Ireland, and Portugal will default, even though pretending otherwise may continue for a while.

Secret Iran Gold holdings leaked: Iran holds same amount of Gold as United Kingdom and is buying more.

Target 73.31

from zero hedge…

<<Does anyone seriously think the global recovery is still intact? Based on what? Does anyone think that stagnant/declining wages, falling real estate values, skyrocketing prices for materials and energy, and belt-tightening by bankrupt States are ideal foundations for higher profits? Anyone who doesn’t realize the quake in Japan is a tragic load dumped on a fragile addict’s quivering back (i.e. the global recovery) will undoubtedly be surprised by how fast the global economy will start unraveling. Anyone who kept their eyes open is only wondering how a debt and propaganda-fueled recovery lasted this long.>>