Portugal Misses Columbus



Portugal workers protesting...

 

Just as the market closed last week, the Portuguese constitutional court decided that several provisions of the country's 2013 budget were not constitutional. According to the high court, cuts in wages and pensions of public employees were unfair (there's that word again) because they targeted only the public sector. The court rejected plans to cut one of the 14 paychecks that public workers usually get each year and to slash 6.4% from pensions for retirees. 

 

This coincided with the government warning that the court's decision would put into question the country's ability to fulfill its €78 billion international bailout program, which in turn would send bondholders of Portuguese sovereign debt scrambling for the exits as suddenly the country may find itself in the ECB's "dunce" corner, with Draghi preparing to pull a "Berlusconi" on a government which can't even whip its judicial branch in line. However, of more immediate concern is how will the government now plug a hole of up to €1.3 billion in its €5.3 billion 2013 budget. A solution has, luckily, presented itself: bypass the unconstitutional provisions by paying government workers not in cash, but in government bills!

From the WSJ:

The Portuguese government is considering a plan to pay public workers and pensioners one month of their salary in treasury bills rather than cash after a high court ruled out wage cuts, a person familiar with the situation said Sunday.  "This is one of the ideas being considered," the person said. By paying one month of salary in T-bills to public workers and pensioners, the government would save an estimated €1.1 billion in expenses, narrowing the budget gap significantly.

Since the Portuguese government can’t print money as they operate under the ambit of the euro which is managed by the ECB and Eurosystem (central banks of the Eurozone), then they will simply “print” debt papers.

Debt papers will possibly attain traits of “moneyness” or exchangeability. Since T-bills will be used by public employees and pensioners for exchange of goods and services.

More debt leads to higher taxes which will pose as a hindrance to productive commercial enterprises.

More sovereign debt issuance can be used as collateral by the Portuguese government to secure loans from the ECB, or that debt may be monetized by the ECB. So the Portuguese government will likely be incentivized to print more debt papers.