Portugal Central Bank Bails Out Banco Espiritu Santo

I previously noted of the banking turmoil happening in Portugal: Add to Bulgaria’s woes has been the recent hubbub over Portugal’s largest listed lender the Banco Espiritu Santo (BES) which just filed for creditor protection following the company’s newly discovered financial irregularities and the failure to make payments to creditors. Following March highs, Portugal’s stock market  plummeted into the bear market as the BES saga unraveled. 

Well governments (like China) are back into a frantic bailout mode. The Portuguese Central Bank reportedly announced a $6.6 billion rescue of Banco Espiritu Santo (BES) 

From Bloomberg:

Portugal’s central bank took control of Banco Espirito Santo SA, once the country’s largest lender by market value, in a 4.9 billion-euro ($6.6 billion) bailout that will leave junior bondholders with losses.

The Bank of Portugal’s Resolution Fund will move Banco Espirito Santo’s deposit-taking operations and most of its assets to a new company, Novo Banco, which it will own outright. The fund will finance the rescue with a Treasury loan to be repaid by Novo Banco’s eventual sale. Espirito Santo shareholders and junior bondholders will be left with the most “problematic” assets, including loans to other parts of the Espirito Santo Group and the lender’s stake in its Angolan operation, according to a central bank statement yesterday.

“Shareholders, subordinated debt holders as well as board members or former board members directly involved in the more recent events, and not the taxpayers, will be called to shoulder the losses incurred by a banking business they failed to adequately oversee,” the Finance Ministry said in a statement.

Banco Espirito Santo has been forced to take public money after regulators uncovered potential losses on loans to other companies tied to Portugal’s Espirito Santo family and ordered the lender to raise capital. Bank of Portugal Governor Carlos Costa had sought to find private investors to inject the cash, and said government funds would only be a last resort. The Portuguese government has about 6.4 billion euros remaining from its European Union-led bailout in 2011 to fund the capital injection.

So the Portugal government’s BES bailout will leave little contingent funds for any other potential financial instability.

Chart from Reuters

The sustained meltdown in BES shares has prompted the Portuguese government to suspend trading.

The BES ruckus has even spilled over to Portugal’s major equity benchmark the P-20, which has been hammered, now back to a bear market 

Here is the timeline of the BES saga.

The BES episode is a reminder that, despite previously rising stocks and today’s bail out, all have not well in the Eurozone.

Portugal Considers Using T-Bills to Pay Public Workers and Pensioners

Crisis stricken governments have been finding ways to skirt requirements for them to scale down on their bloated bureaucracies. 

Rumors have circulated that the Portuguese government have contemplated on paying public workers and pensioners in Treasury bills.

From the Wall Street Journal,

In his televised statement, Mr. Passos Coelho said the government would try to revise its budget plan through new spending cuts rather than new tax increases. A person close to the government said it had mulled the idea of paying public employees and pensioners one month of their income in Treasury bills, forcing them, in effect, to lend the Treasury the money the court said it couldn't cut from their paychecks. A government spokeswoman denied that the idea was being considered.

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.

One thing leads to another. “One month” of income may become a slippery slope towards perpetuity. This means debt papers may eventually substitute the euro (Gresham’s law).

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.

With debt papers used as money, this amplifies inflation risks.

More debt also means Portugal will remain stuck in her debt crisis.

And if and when Portugal defaults, then public workers and pensioners and all those other sovereign debt holders will become the “greater fools” (greater fool theory).

In Pictures: The Eurozone’s “Austerity” Programs

I’ve been saying that whatever politicians, media and their zealot followers label or lay claim as “austerity” programs has been a blatant canard.

The precious deck of graphs below from tradingEconomics.com give us the perspective

First the Eurozone’s Government Debt to GDP

Ok, one might argue that the steady ascent of government debt relative to GDP has been happening because of recessions or economic growth slowdown.

So the second set of graphs which exhibits their respective fiscal conditions is meant to give us a better understanding.

Note, reference points of comparisons are very important and sensitive to making claims.

It is TRUE that government spending in the aforementioned countries above has somewhat been reduced compared to, or when based from 2010.

But except for Portugal, whose authorities have admitted that government spending does NOT work, spending levels have substantially been elevated compared to, or based from 2000-2007 for most of the Eurozone, especially the crisis afflicted nations. Add to this the ballooning balance sheets of the ECB.

From the above, we can see that whatever claims of “austerity” have been representative of half-truths, and which in reality, signifies as terminological prestidigitation.

So the return of pro-welfare governments will only exacerbate their current woes based on unsustainable political economic conditions and amplifies the transmission of the many risks (credit, currency, inflation, interest rate and etc...) to the world.

Drug Decriminalization Caravan Gets Rollin'

In our earlier posts War on Drugs: Learning From Portugal's Drug Decriminalization and Nicolas Kristof: Why The War On Drugs Is A Failure, we opined that sentimentalism over "the war on drugs" has to give way to economic realities and a more humane oriented approach.

Resources uneconomically spent for prohibition and detention should instead be diverted into education, treatment and the protection of private property.

As New York Times' Nicolas Kristof in a recent highly articulate commentary, (bold highlight mine)

``Look, there’s no doubt that many people in prison are cold-blooded monsters who deserve to be there. But over all, in a time of limited resources, we’re overinvesting in prisons and underinvesting in schools.

``Indeed, education spending may reduce the need for incarceration. The evidence on this isn’t conclusive, but it’s noteworthy that graduates of the Perry Preschool program in Michigan, an intensive effort for disadvantaged children in the 1960s, were some 40 percent less likely to be arrested than those in a control group.

``Above all, it’s time for a rethink of our drug policy. The point is not to surrender to narcotics, but to learn from our approach to both tobacco and alcohol. Over time, we have developed public health strategies that have been quite successful in reducing the harm from smoking and drinking.

``If we want to try a public health approach to drugs, we could learn from Portugal. In 2001, it decriminalized the possession of all drugs for personal use. Ordinary drug users can still be required to participate in a treatment program, but they are no longer dispatched to jail.

``“Decriminalization has had no adverse effect on drug usage rates in Portugal,” notes a report this year from the Cato Institute. It notes that drug use appears to be lower in Portugal than in most other European countries, and that Portuguese public opinion is strongly behind this approach.

``A new United Nations study, World Drug Report 2009, commends the Portuguese experiment and urges countries to continue to pursue traffickers while largely avoiding imprisoning users. Instead, it suggests that users, particularly addicts, should get treatment."

Now, it appears that indeed several Latin American Countries have begun to assimilate the Portugal Experience; Mexico and Argentina has opened their doors for the less antagonistic option by decriminalizing drugs.

According to Juan Carlos Hidalgo of Cato, (bold highlights mine)

``Following in Mexico’s footsteps last week, the Supreme Court of Argentina has unanimously ruled today on decriminalizing the possession of drugs for personal consumption.

``For those who might be concerned with the idea of an “activist judiciary,” the Court’s decision was based on a case brought by a 19 year-old who was arrested in the street for possession of two grams of marijuana. He was convicted and sentenced to a month and a half in prison, but challenged the constitutionality of the drug law based on Article 19 of the Argentine Constitution:

``The private actions of men which in no way offend public order or morality, nor injure a third party, are only reserved to God and are exempted from the authority of judges. No inhabitant of the Nation shall be obliged to perform what the law does not demand nor deprived of what it does not prohibit.

``Today, the Supreme Court ruled that personal drug consumption is covered by that privacy clause stipulated in Article 19 of the Constitution since it doesn’t affect third parties. Questions still remain, though, on the extent of the ruling. However, the government of President Cristina Fernández has fully endorsed the Court’s decision and has vowed to promptly submit a bill to Congress that would define the details of the decriminalization policies.

``According to some reports, Brazil and Ecuador are considering similar steps. They would be wise to follow suit."

We, Filipinos, should learn from their experiences.

War on Drugs: Learning From Portugal's Drug Decriminalization

In an earlier post,[see Nicolas Kristof: Why The War On Drugs Is A Failure], we dealt with the unorthodox suggestions of how to deal with the Drug menace.

Drugs isn't just a social problem, it encapsulates economic, political and the regulatory dimensions. Hence, the required approach should be holistic than simply "moralistic".

Of course, theories won't be persuasive if unmatched by actual experience, thereby, Portugal's 7 years experience on the drug decriminalization path could serve as noteworthy paradigm.

The essence of drug decriminalization seems simple: it transforms government's role from strong arm "fear-based" antagonistic approach into "mentorship" guidance, where government spends the substance of its efforts in education and treatment than from prohibition.

Moreover, the diminished operating costs enables the freeing up or shifting of government resources into more constructive means to deal with the problem, which in essence lowers the barriers of collaboration with the public.

And because the relationship switches to a more congenial climate, the impact from enforcement tends to have a high degree of success.

In short, from fear based approach to a cooperation, sympathy and treatment based solution.

The following is an article, which includes a video interview from Reason.tv ., explains the Portugal experience....

(all bold highlights mine)

Glenn Greenwald is a civil rights attorney, a blogger for Salon, and the author of a new Cato Institute policy study called “Drug Decriminalization in Portugal: Lessons for Creating Fair and Successful Policies.” The paper examines Portugal’s experiment with decriminalizing possession of drugs for personal use, which began in 2001. Nick Gillespie, editor of reason.com and reason.tv, sat down with Greenwald in April.

Q: What is the difference between decriminalization and legalization?

A: In a decriminalized framework, the law continues to prohibit drug usage, but it’s completely removed from the criminal sphere, so that if you violate that prohibition or do the activity that the law says you cannot do you’re no longer committing a crime. You cannot be turned into a criminal by the state. Instead, it’s deemed to be an administrative offense only, and you’re put into an administrative proceeding rather than a criminal proceeding.

Q: What happened in Portugal?

A: The impetus behind decriminalization was not that there was some drive to have a libertarian ideology based on the idea that adults should be able to use whatever substances they want. Nor was it because there’s some idyllic upper-middle-class setting. Portugal is a very poor country. It’s not Luxembourg or Monaco or something like that.

In the 1990s they had a spiraling, out-of-control drug problem. Addiction was skyrocketing. Drug-related pathologies were increasing rapidly. They were taking this step out of desperation. They convened a council of apolitical policy experts and gave them the mandate to determine which optimal policy approach would enable them to best deal with these drug problems. The council convened and studied all the various options. Decriminalization was the answer to the question, “How can we best limit drug usage and drug addiction?” It was a policy designed to do that.

Q: One of the things you found is that decriminalization actually correlates with less drug use. A basic theory would say that if you lower the cost of doing drugs by making it less criminally offensive, you would have more of it.

A: The concern that policy makers had, the frustration in the 1990s when they were criminalizing, is the more they criminalized, the more the usage rates went up. One of the reasons was because when you tell the population that you will imprison them or treat them as criminals if they identify themselves as drug users or you learn that they’re using drugs, what you do is you create a barrier between the government and the citizenry, such that the citizenry fears the government. Which means that government officials can’t offer treatment programs. They can’t communicate with the population effectively. They can’t offer them services.

Once Portugal decriminalized, a huge amount of money that had gone into putting its citizens in cages was freed up. It enabled the government to provide meaningful treatment to people who wanted it, and so addicts were able to turn into non–drug users and usage rates went down.

Q: What’s the relevance for the United States?

A: We have debates all the time now about things like drug policy reform and decriminalization, and it’s based purely in speculation and fear mongering of all the horrible things that are supposedly going to happen if we loosen our drug laws. We can remove ourselves from the realm of the speculative by looking at Portugal, which actually decriminalized seven years ago, in full, [use and possession of] every drug. And see that none of that parade of horribles that’s constantly warned of by decriminalization opponents actually came to fruition. Lisbon didn’t turn into a drug haven for drug tourists. The explosion in drug usage rates that was predicted never materialized. In fact, the opposite happened.

Watch Glenn Greenwald and Reason.tv's Nick Gillespie discuss both the lessons from Portugal and Barack Obama's disappointing performance so far on drug policy, executive power, and civil liberties by clicking on this link