Spain and Portugal have each announced austerity measures aimed to reduce the size of their budget deficits. Spain will reduce public-sector wages by 5% this year and freeze them next year, along with freezing pensions. Portugal is cutting salaries of government ministers and other top officials by 5% and raising their value added tax by 1% to 6% for necessities, 13% for restaurants and 21% for other items.
These countries are part of the European Union countries that market concerns about their debts led to a $1 trillion European debt backup plan that was announced last weekend. All of this was kicked off by Greece and their economic problems.
The issue is simple. At some point lenders (those that buy your countries debt) no longer believe you have the financial strength necessary to support your debt at its present rate, and they demand much higher rates. The 2-year notes of Greece went up as high as 18% rate of interest. Portugal and Spain are trying to get their house in order before something similar happens to them. The question is when will the U.S. get serious about its financial situation!?
Showing posts with label U.S. dollar. Show all posts
Showing posts with label U.S. dollar. Show all posts
Thursday, May 13, 2010
Thursday, March 25, 2010
Portugal debt downgrade-- more lessons for the U.S.
The ratings service Fitch downgraded the government debt of Portugal from AA to AA- given concern over the level of debt and a budget deficit that last year was 9.3% of GDP. This left the 10-year bonds of Portugal trading at a yield of about 1.25% over the benchmark German bund.
In response today the Portugal parliament (led by the left-leaning Socialist party) passed a resolution of support for an austerity program that includes welfare benefit cuts, reduction in military spending and government employee pay freezes. The goal of the austerity program is to reduce the deficit to under 3% of GDP.
These significant steps by Portugal are what must happen when the market loses confidence in your country's debt. We should not overstate the magnitude of this issue, since Portugal has a GDP of about $230 billion making it about the same size economy as our own Indiana. The lesson we hope Washington leaders would learn: don't wait to behave in a fiscally responsible fashion until the market forces it upon you.
In response today the Portugal parliament (led by the left-leaning Socialist party) passed a resolution of support for an austerity program that includes welfare benefit cuts, reduction in military spending and government employee pay freezes. The goal of the austerity program is to reduce the deficit to under 3% of GDP.
These significant steps by Portugal are what must happen when the market loses confidence in your country's debt. We should not overstate the magnitude of this issue, since Portugal has a GDP of about $230 billion making it about the same size economy as our own Indiana. The lesson we hope Washington leaders would learn: don't wait to behave in a fiscally responsible fashion until the market forces it upon you.
Tuesday, October 13, 2009
Former Treasury official's prescription for deficit reduction
Former deputy US Treasury secretary Roger Altman wrote an opinion article published in the Financial Times this weekend (http://tiny.cc/omEn6) in which he expressed significant concern over the level of budget deficits and their effect on interest rates and the US dollar. Mr. Altman points out that the continued budget deficits over the next 10 years would result in the Treasury having to borrow $4 trillion annually and asks the question "does anyone think that once recovery takes hold and private demand for capital strengthens, the Treasury will raise $4 trillion per year at below 4 per cent, as it is doing today?"
Altman sees the potential for rising inflation, rising interest rates and significant decline in the value of the dollar unless something is done to get the US budget deficit under control. His proposal-- legislation creating a bipartisan deficit reduction group of administration and congressional leaders who will study the possible solutions for cutting spending and raising revenues and make recommendations by December 31, 2010 that are then submitted to Congress for an up or down vote.
We can hope our leaders will do something like Mr. Altman has proposed and we can also hedge against the rising inflation, higher interest rates and weaker dollar in the event they don't.
Altman sees the potential for rising inflation, rising interest rates and significant decline in the value of the dollar unless something is done to get the US budget deficit under control. His proposal-- legislation creating a bipartisan deficit reduction group of administration and congressional leaders who will study the possible solutions for cutting spending and raising revenues and make recommendations by December 31, 2010 that are then submitted to Congress for an up or down vote.
We can hope our leaders will do something like Mr. Altman has proposed and we can also hedge against the rising inflation, higher interest rates and weaker dollar in the event they don't.
Sunday, October 4, 2009
Diversifying from the U.S. dollar
Seasoned U.S. investors generally grew up in a period of worldwide economic dominance by the United States. For the past 2 decades, or more, investors of all countries purchased U.S. investment assets and hard assets (like real estate) because the U.S. was seen as the economic world leader. The U.S. dollar was the reserve currency of the world (ie. the default currency for crossborder transactions and the safe haven currency in times of turmoil).
The economic landscape seems to be changing. Economic growth in the U.S. going forward may well lag that of the rest of the world, particularly emerging markets. Fiscal budget deficits in the U.S. and resultant borrowing demands may put upward pressure on interest rates and downward pressure on the dollar. Worldwide investors may sell U.S. dollar denominated holdings to create the funding for diversifying into other areas of the world.
If things turn out as discussed above, the ones to reduce their dollar exposure earlier will fare better than those who continue to be significantly overweight the dollar. There will certainly be periods of U.S. dollar strength, however those who continue to hold the vast majority of their investments in U.S. dollar denominated holdings may find themselves suffering poor relative performance as compared to the rest of the world over the long-term.
The economic landscape seems to be changing. Economic growth in the U.S. going forward may well lag that of the rest of the world, particularly emerging markets. Fiscal budget deficits in the U.S. and resultant borrowing demands may put upward pressure on interest rates and downward pressure on the dollar. Worldwide investors may sell U.S. dollar denominated holdings to create the funding for diversifying into other areas of the world.
If things turn out as discussed above, the ones to reduce their dollar exposure earlier will fare better than those who continue to be significantly overweight the dollar. There will certainly be periods of U.S. dollar strength, however those who continue to hold the vast majority of their investments in U.S. dollar denominated holdings may find themselves suffering poor relative performance as compared to the rest of the world over the long-term.
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