First Greece, then Ireland and now Portugal. The eurozone sovereign debt crisis is about to claim its third victim.
After the resignation of Prime Minster Jose Socrates yesterday, an EU and IMF-financed bail-out of Portugal now seems inevitable.
Portugal, like Spain, Greece, Ireland and Italy, has huge debts. Worryingly for Spain and Italy, Portugal is actually in the strongest position to repay. The interest payments alone are difficult to meet with bond holders demanding ever higher interest rates.
The root of the problem is that the economies of southern Europe are totally out of kilter with those of in the north. Real wages in the PIIGS economies rose 30% in the last decade while Germany’s remained flat.
Portugal, Italy, Ireland, Greece and Spain are uncompetitive. They now sell far fewer goods and services overseas than they did 10 years ago and this means less foreign exchange income to repay and service debt.
Other than defaulting, there are only three ways to solve the problem:
* Reduce nominal wages – boost competitiveness and increase foreign exchange earnings
* Devaluation – exit the Euro to boost competitiveness
* Inflation – Reduce the real value of debt by raising prices
As the resignation of Portugal’s Prime Minister shows, reducing living standards in a democracy is almost impossible. Breaking up the Euro is equally politically damaging, although a two-tier Euro zone may eventually be inevitable.
The path of least resistance is printing money. The Federal Reserve and Bank of England are now experts and the Bank of Japan has recently joined the party. The European Central Bank is sure to turn the taps on again soon. It can’t afford to bail out Spain or Italy without doing so.
The decade we’re in is likely to be compared to the 1970’s. High inflation and low growth will be the key characteristics. The best way to make money in the 1970’s was buying property.
Prime real estate is the ultimate hedge against rising prices. It is sure to be a good decade for readers with cash-rich clients and access to prime property in scarce locations.
Source: Global Edge