Wednesday, February 15, 2012

Portugal, A Shining Example?

As a continuation of my post Other Options, I offer  you this.

The NYTimes offers up an example of what could be in store for Greece who is currently playing obedient child to the IMF, it gives us Portugal. According to the article, Portugal has done everything it has been asked, chopping social welfare and raising taxes. Yet, its debt ration keeps getting worse due to the fact that its economy continues to shrink partly caused by the austerity cuts imposed by the IMF to help pay back its debtors.

Without growth, reducing debt levels becomes nearly impossible. It is akin to trying to pay down a large credit card balance after taking a pay cut. You can slash expenses, but with lower earnings it is hard to set aside money to pay off debt.

This kind of goes without saying, but yea. If all your measures are focused on cutting the debt and not worried about bringing back some growth and occupying the millions out of work, there won't be any money to actually pay those debts down.

The Times this time shows a precedent, and though it is not offered as an alternative, that is historical and shows how things are most likely to be played out. These situations have been confronted before. There have been countries that simply could not pay back their debt. There were those who tried the austerity cuts and those who wouldn't. The example is there to follow, if we will.

If Portugal and other European debtors find it increasingly difficult to pay off their creditors because of slow or no growth, some experts predict they, too, might eventually need to negotiate debt write-downs. That was how things played out in Latin America in the 1980s, once it became clear that the I.M.F.’s relentless austerity push was impeding the growth that countries needed to pay down debt.

Of course, the IMF would never bring these ideas or happening up its too busy worrying about its own self interest. The austerity cuts are not meant to help the country in debt, rather they are meant to get as much money out as possible before they are cut off.

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