Sunday, 7 April 2013

Troika make Portugal suffer - We should remember our oldest ally

As the Scots ruminate on whether they should throw the towel in on over 300 years of partnership with the English it’s important to put our alliance with the “Jocks” in perspective.  The English have much older and more solid alliances and in particular we have been bound to Portugal by treaty since May 1386.  In fact our diplomatic friendship goes even further back to the 1147 Siege of Lisbon, when English Crusaders en route to the Holy Land stopped and helped Portuguese King Afonso Henriques to conquer the city occupied by the Moors.

The treaty of  Windsor says  “It is cordially agreed that if, in time to come, one of the kings or his heir shall need the support of the other, or his help, and in order to get such assistance applies to his ally in lawful manner, the ally shall be bound to give aid and succour to the other, so far as he is able (without any deceit, fraud, or pretence) to the extent required by the danger to his ally’s realms, lands, domains, and subjects; and he shall be firmly bound by these present alliances to do this.”

King Alphonso
This weekend Pedro Passos Coelho, Portugal’s prime minister has been struggling to keep the country’s €78bn bailout programme on track (Cyprus only needed €15bn) after the court ruled that four measures breached a constitutional requirements for fairly distribution of the financial pain.  As old a trusted allies we might expect a call from Portugal as they struggle to save themselves from the unholy alliance that is the Troika (European Commission, ECB and the IMF ), who are at least as frightening at the Moors who Alfonso defeated.  Fortunately round one in the crusade against the Troika has been won by Portugal whose courts refused to authorise the full version of the latest round of austerity cuts

Of course everyone is pretty uninterested on our virtuous allies the Portuguese, all eyes are now turned towards Spain which is, of course, a bigger and more important economy. The Spanish fear that, economically and politically, Portugal offers a vision of their future. The recession there is deeper and so are the cuts to government spending. But with Spain facing another year of recession and cuts – the Spanish too are wondering how long their public will tolerate austerity.  They are also nervous as to whether they can continue to borrow in the international bond markets at affordable rates after these the two Bail-out shocks. 

The trouble in Portugal is one blow. The other, of course, was the Cypriot bail-out that wasn’t a bail-out but a bail-in.  I got into trouble with my Dutch readers a week ago when I had a blast at Jeroen Dijsselbloem but it’s now fair to say that the Dutch finance minister is, by some margin, the most unpopular European minister in Spain. His idea that the Cypriot deal could be a “template” for future bail-outs is regarded with deep suspicion in Madrid, since it implies that if Spain’s banks ever need to be rescued (which they will), big depositors could also take a hit there too. The risk, obviously, is of capital flight from already under capitalised banks. If the Spanish have half an eye on what happen to Cyprus, where the Troika put bank depositors to the sword in a crusade like blood bath, they should be afraid, very afraid!

Whilst the Spanish have nowhere to turn the Portugues can of course dig out the treaty of Windsor and apply to join the United Kingdom (one in one out) and enjoy the economic benefits of the Pound!

By David Denton

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