Crossfire in Europe



-Today Ireland’s PM Brian Cowen released the country’s four year budget plan to cut €15 Billion from the deficit. The plan hopes to cut €10 billion from spending and raise €5 billion in extra taxes, and includes:

  • 24,750 public sector job cuts
  • €2.8bn reduction in social welfare spending
  • Plans to raise an additional €1.9bn from income tax
  • The minimum wage will be cut by €1 cut to €7.65 an hour
  • VAT will be raised from 21% to 22% in 2013, with a further increase to 23% in 2014
  • A property levy, called a site tax, will be introduced
  • Unemployment is expected to fall from 13.5% to below 10% over the four years
  • The government forecasts the economy will grow by an average of 2.75% in the years from 2011 to 2014
  • Corporate rate of tax of 12.5% will remain untouched
  • Target to narrow the budget deficit to 3% of GDP by end of 2014

Catalyst: On Dec. 7th lawmakers are scheduled to vote on the country’s 2011 budget in parliament, which is expected to shave €6 billion from the budget through spending cuts (~€4.5 Billion) and tax hikes of ~€1.5 Billion. Passage of the package should ensure a funding (bailout) agreement from the EU and IMF, projected at €85 Billion.


PM Cowen, who publically stated on Monday that he is prepared to dissolve his government following the passage of the 2011 austerity package and EU/IMF bailout, is standing on pins and needles as opposition parties are demanding snap elections. Further, Cowen’s narrow 3-seat parliamentary majority with his junior coalition partners, the Green Party, threatens to vote against him in a by-election vote tomorrow, which could further turn sentiment against him. [For more, see our post on 11/23 titled “Voted Off the Island”.]


Main Issue: while the Irish may meet the demands of the EU/IMF to find savings worth €6 billion next year to secure a bailout, the government makes a rather lofty growth estimate for the country given the severity of austerity measures, which we believe should choke off growth to levels far below the government’s projections.





-Workers are on striking across the country protesting austerity measures today; infrastructure ground to a halt.


Catalyst: On Friday (11/26) PM Jose Socrates and his Socialist government attempt to pass the final round of legislation on its 2011 spending plan, with austere measures including:

  • 5% wage cut for public workers earning more than $2,005/month
  • Hiring freeze of government jobs
  • Raising VAT 2% to 23%

All these measures are designed to shave down the country’s budget deficit that stood at 9.3% of GDP in 2009. While the OECD thinks Portugal can reduce its deficit to 4.6% in 2011, markets are telling a lot less convincing story with yields and credit spreads rising to higher highs (chart below). Further, data suggests its budget gap has increased +1.8% in the first 10 months of this year. One bullish point to note is that the country does not have a bond redemption until April 2011 and has completed this year’s bond sales.  


Crossfire in Europe - eyield


Main Issue: while the country did not experience a housing bubble like Ireland or Spain, Portugal has not shown real growth prospects, with Real annual GDP growth up a mere +0.4% on average over the last 7 years.  The country’s inability to grow could severely weigh on investor confidence that it can clean up its fiscal imbalances short of a EU/IMF bailout, similar to the cases of Greece and Ireland. It’s estimated that 80% of the country’s debt is held by foreigners, which further compounds the country’s ability to “internally” fix its fiscal imbalances. 





-An estimated 10,000 students held protests across the U.K. over plans to cut funding for education and increase university tuition fees.


Main Issue: As part of the effort by UK PM Cameron’s government to slash 81 billion pounds from public spending by 2015 to reduce the country’s deficit , Cameron is allowing British universities to charge as much as 9,000 pounds ($14,218) a year for tuition, compared with the current 3,290 pounds, as the government seeks to cut subsidies to colleges.


Take Away: We continue to believe that fiscal austerity measures will equate to social unrest.



And on that cherry note, Happy Thanksgiving!


Matthew Hedrick


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