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Portugal just received a $115 billion bailout and they are trying to avoid some of the problems Greece and Ireland are having by striking a better balance between taking austerity measures and fueling growth. The worry is that the deep budget cuts in Ireland and Greece are hampering their growth which makes it more difficult to repay their debts and is resulting in even higher interest rates.
In some ways the U.S is being forced to find this balance as well. We are trying to cut away excess expenses but also keep healthy growth. Do you think the IMF's reduced expectations for Portugal's cuts send the wrong (too lenient) message, or is it in the overall best interest of everyone? Is this short term vs long term where more cuts could result in a cultural change to operate in a financially responsible manner in the future or will they hurt growth too much in the short run to be worth it?
I think we are in for along time of limited growth. From what we have learned about the cycle of growth I think we are in the trough of the wave, the slump and that we won't get out of it soon. I think it will take a long time. In terms of interest rates I think in the US the rate has been way too low for too long and perhaps it might be hampering us?
ReplyDeleteI think these cuts have an implication for long term growth, and are thus in the best interest for everyone. Although growth here in the US is slowly increasing, it is indeed increasing and I think that says a lot as we look towards short term growth as well. The fact is, we are coming out of a recession and it's going to take some time to fully recover. However, I think over the next 3 to 5 years there will be significant growth in many sectors across the country. Most importantly though, I think it is the long term perspective that we need to keep in mind; restructing now and learning how to find this balance will allow us to manage our finances more efficiently in the future.
ReplyDeleteWhile the cuts are hampering growth, it is better in the long run. Because the country is learning to find the proper balance between cuts and spending. Ideally, the right balance will lead to future growth with less risk of recessions. Unfortunately we all know the world is not an ideal place so we'll have to wait and see what happens.
ReplyDeleteIn my opinion, I think that the cut backs in spending will pay off in the long run for Portugal.
This is an interesting discussion, and I think it is representative of a larger problem. We have been talking about regulation of the financial industry. And, personally, I think that it is necessary. At the same time, I want to see us get out of this poor economy. These are two hopes are at odds. Policy that facilitates growth is the opposite of regulation and cutting interest rates. And while, I do not think we necessarily need to implement regulation and raise interest rates when the economy is down (because there is not great risk), I know that when we actually need it, when the economy is doing well, we will not have the discipline to stifle the prosperity by regulating and raising interest rates.
ReplyDeleteSo, I guess I'd say that we need to just take the beating a little longer, not be so obsessed with short-term growth, and take the safe action now.
So, perhaps I'm not smart and do not entirely understand the nuances of whats going on, but agreeing with those above. But measures such as "The aid program also foresees Portugal raising sales taxes on goods like cars and cigarettes, while cutting corporate tax exemptions and public subsidies to private companies" will create long term growth.
ReplyDeleteI agree with everyone above. Unfortunately, short term cuts will hinder GDP growth and this growth is needed to sustain debt payments. As the article states this will result in higher interest rates for the government creating a sort of self fulfilling prophecy where the solution to the problem (decreased spending) also creates the problem (an increase in interest rates making money more expensive).
ReplyDeleteThe solution is certainly not an easy one which is obviously why we are seeing so much news about it.
You guys make some good points, I guess the question is how long will it take before the benefits of austerity measures will hit a tipping point and start making up for the short term loss in growth. The cyclical issue that Chris points out could mean that that point is far away. Talk about a difficult cost-benefit analysis problem.
ReplyDeleteThanks you guys for answering. I see both sides of the issue now. I guess what I am worried about is how long will it be before we are out and back into growth but I would rather it was a sustainable long term, slow rise growth rather than a quick boom bust as we have been seeing in recent years. And I agree that it is a difficult cost -benefit analysis problem. :D
ReplyDeleteI agree with Chris and the others. The situation in Portugal is scary and I can see why people are losing faith in the country. The yield on the country's 10-year bond has been above 9 percent for weeks, an unsustainable level that shows investors do not trust Portugal to pay back its longer-term debt. The European Commission has backed lower interest rates for bailed out countries, arguing that the conditions attached to rescue loans are already so tough that no country would seek help unless it absolutely had to. Economists have said that the interest rate should instead focus on making it possible for a country to actually repay its debts. However, under the current conditions, the rate demanded for Portugal's bailout isn't far off the returns that investors have recently charged for lending money in the short-term. The EU and IMF loans will likely come with a maturity similar to the 7 1/2 years given Ireland and Greece.
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