THE HANDSTAND |
FEBRUARY-MARCH2010
|
"Banking
establishments are more dangerous than standing armies."
"The central bank is an institution of the
most deadly hostility existing against the Principles and
form of our Constitution. I am an Enemy to all banks
discounting bills or notes for anything but Coin. If the
American People allow private banks to control the
issuance of their currency, first by inflation and then
by deflation, the banks and corporations that will grow
up around them will deprive the People of all their
Property until their Children will wake up homeless on
the continent their Fathers conquered."
UPDATED:TARP report
predicts crash......
BARRIE
MCKENNA
WASHINGTON
From Wednesday's Globe and MailPublished on Wednesday,
Feb. 03, 2010
With
the spotlight on U.S. President
BarackObama'sproposed bank reforms and record-setting
deficits it's easy to forget that tackling the root
causes of the financial crisis remains unfinished
business.
Mr.
Obama has proposed a series of bank reforms aimed at
reining in risk, including a tax on big banks, a ban on
their proprietary trading, and a limit on their
liabilities.
But
these measures are overshadowing a key problem, some
critics say. The incentives for both banks and homeowners
to pile on risk are as strong as ever.
In
a sobering 224-page report this week, the federal
watchdog responsible for overseeing the $700-billion (U.S.)
Troubled Asset Relief Program argued that failed reform
could put the United States on course for another bubble
- and crash.
"Even
if TARP saved our financial
system from driving off a cliff in 2008, absent
meaningful reform, we are driving on the same winding
mountain road, but this time in a faster car," said
Neil Barofsky, TARP's special inspector general.
The
U.S. Federal Reserve, along with government-backed
lenders Fannie Mae and Freddie Mac, continue to prop up
the housing market by guaranteeing or insuring virtually
all new mortgages and mortgage-backedsecurities.
Americans
also enjoy a tax system that pushes them to max out their
credit limit on first and second homes because mortgage
interest is fully deductible. Congress recently boosted
those generous incentives with an $8,000 credit for first-time
home buyers.
And
so far, none of the proposed financial reforms addresses
the critical problem of banks that are so large they
endanger the financial system, according to Mr. Barofsky.
He
warned that all the "money, moral hazard ... and
government credibility" will be wasted if the U.S.
sinks into an even deeper crisis in the next decade.
"It is hard to see how any of the fundamental
problems in the system have been addressed to date,"
he wrote bluntly.
And
reform won't get any easier from here on in, now that the
Democrats have lost their veto-proof 60-40 vote margin in
the U.S. Senate.
Even
Mr. Obama's call last week for a ban on proprietary
trading at the country's big banks is running into stiff
resistance in Congress, which must pass legislation to
make it happen.
The
result, critics said, is likely to be a further watering
down of an already ineffectual financial reform package.
"Unfortunately,
for whatever reason, the Obama administration remains
convinced that merely tweaking our existing regulations
is the only responsible way forward," said Simon
Johnson, a senior fellow at the Washington-based Peterson
Institute for International Economics and a former top
economist at the International Monetary Fund.
Mr.
Johnson echoed Mr. Barofsky's warning that the United
States has not dealt with the problem of banks that are
too big to fail.
"We
are smack in the middle of a doomsday cycle of repeated
boom-bust-bailout," he cautioned. "If anything,
as these banks have increased in size, the problem is now
worse."
Mr.
Barofsky, a lifelong Democrat and former drug fighting
prosecutor appointed by former U.S. president George W.
Bush, also complained there has been "little
fundamental change in the excessive compensation culture
on Wall Street."
Perhaps
most ominously, Mr. Barofsky warned that the government's
multiple efforts to bolster home prices may be
reinflating the bubble that caused the crisis.
"Between
net mortgage lending and existing mortgage management,
the Federal Government now completely dominates the
housing mortgage market, with the taxpayer shouldering
the risk that had once been borne by the private sector,"
he pointed out.
Mr.
Barofsky has been a thorn in the side of both the Obama
administration and Congress for months, pursuing
allegations of misuse of TARP funds as well as the events
that led to the bailout of failed insurer American
International Group.
Mr.
Barofsky acknowledged that many of TARP's stated goals
have not been met. Bank lending continues to contract and
home foreclosures remain at record levels and mortgage
modifications haven't worked.
Whatever
leverage the government had to push banks to change their
ways was lost when most of the large banks repaid their
TARP loans, according to Mr. Barofsky.
In
a recent New York Times interview, Mr. Barofsky said he
was stunned when he arrived in Washington to take up his
post to discover billions of government dollars flying
out the door, with so few controls.
*****
KEY
DATES IN THE U.S. MORTGAGE INDUSTRY
1989-92: U.S.
government steps in during the savings-and-loan crisis,
to help make up for the loss of lending capacity in that
sector.
1990s: Private
lenders account for approximately half of net mortgage
borrowings in the U.S.
2003: Government-backed
lending begins to drop, reflecting a surge in private
mortgage lending, particularly that related to mortgage-backed
securities (MBS).
2003-04: Government-backed
share of net new mortgages decreases significantly.
2005: MBS
activity accounts for majority of new loans.
2008-now: Private
sector sheds more than $1.5-trillion (U.S.) of mortgage
assets. Government share rises again; it now guarantees
or issues almost all net new borrowing for mortgages and
mortgage-backed securities.
Source:
Office of the Special Inspector General for TARP, January
2010 quarterly report to Congress
the
card
Alan Ahearne keeps close to his chest
The Global Debt Bomb
By Daniel Fisher
01.21.10,
Forbes Magazine
Spending our way out of worldwide
recession will take years to pay back--and create a lot
of pain.
Kyle Bass has bet the house against Japan--his own
house, that is. The Dallas hedge fund manager (no
relation to the famous Bass family of Fort Worth) is so
convinced the Japanese government's profligate spending
will drive the nation to the brink of default that he
financed his home with a five-year loan denominated in
yen, which he hopes will be cheaper to pay back than
dollars. Through his hedge fund, Hayman Advisors, Bass
has also bought $6 million worth of securities that will
jump in value if interest rates on ten-year Japanese
government bonds, currently a minuscule 1.3%, rise to
something more like ten-year Treasuries in the U.S. (a
recent 3.4%). A former Bear Stearns trader, Bass turned $110
million into $700 million by betting against subprime
debt in 2006. "Japan is the most asymmetric
opportunity I have ever seen," he says, "way
better than subprime."
INTERACTIVE ; IS YOUR STATE A DEBT DISASTER?
Bass could be wrong on Japan. The island nation (and
the world's second-largest economy) has defied skeptics
for so long that experienced traders call betting against
it "the widowmaker." But he may be right on the
bigger picture. If 2008 was the year of the subprime
meltdown, 2010, he thinks, will be the year entire
nations start going broke.
The world has issued so much debt in the past two
years fighting the Great Recession that paying it all
back is going to be hell--for Americans, along with
everybody else. Taxes will have to rise around the globe,
hobbling job growth and economic recovery. Traders like
Bass could make a lot of money betting against sovereign
debt the way they shorted subprime loans at the peak of
the housing bubble.
National governments will issue an estimated $4.5
trillion in debt this year, almost triple the average for
mature economies over the preceding five years. The U.S.
has allowed the total federal debt (including debt held
by government agencies, like the Social Security fund) to
balloon by 50% since 2006 to $12.3 trillion. The pain of
repayment is not yet being felt, because interest rates
are so low--close to 0% on short-term Treasury bills.
Someday those rates are going to rise. Then the taxpayer
will have the devil to pay.
Whether or not you believe the spending spree was
morally justified, you have to be concerned about the
prospect of a dismal, debt-burdened fiscal future. More
debt weighs heavily on GDP, says Carmen Reinhart, a
University of Maryland economist. The coauthor, with
Harvard professor Kenneth Rogoff, of This Time It's
Different: Eight Centuries of Financial Folly (Princeton,
2009), Reinhart has found that a 90% ratio of government
debt to GDP is a tipping point in economic growth. Beyond
that, developed economies have growth rates two
percentage points lower, on average, than economies that
have not yet crossed the line. (The danger point is lower
in emerging markets.) "It's not a linear process,"
she says. "You increase it over and beyond a high
threshold, and boom!" The U.S. government-debt-to-GDP
ratio is 84%.
We've been through this scenario before. It's
especially ugly because we get hit by inflation, too. In
the years immediately after World War II inflation surged
past 6%, while economic growth flagged and the government-debt-to-GDP
level exceeded 90%, note Reinhart and Rogoff. The country
worked that ratio down over the next half-century. Now
the ratio is shooting up again.
America is a nation of spendthrifts, addicted to easy
credit and dependent on the kindness of savers overseas
to keep us comfortable. Our retail industry hangs on
credit cards and our real estate on 95% financing and the
tax rewards for mortgage interest. The personal savings
rate has climbed from negative 0.4% in 2006 to a positive
4.5% rate now, but that is still a pathetic figure for a
nation whose government is un-saving all that and more
with its deficit budget. Politicians on this continent
are good at compassion, whether trying to help people
stay in their overpriced homes or offering health care to
millions of those without it. They are not so adept at
nurturing growth.
If the GDP doesn't expand at "normal" rates
of 3% to 5% coming out of this recession, wrestling down
the debt will be very tough, indeed--perhaps impossible
without drastic cuts in spending and higher tax rates on
many fronts. The Congressional Budget Office currently
projects the fiscal deficit will decline from 10% of GDP
next year to around 4.4% from 2013 to 2015. But that
assumes economic expansion of at least 4%, not the 2%
predicted in the study by Reinhart and Rogoff. You see
the vicious cycle here: Debt depresses growth, and then
low growth makes paying down the debt an impossible task.
U.S. corporate income tax receipts were down 55% in
the year ended Sept. 30, 2009 to $138 billion. It may be
a long while before these tax collections get back to
where they were. As corporate profits recover, factory
utilization will be up and inflation will be close behind.
At that point the 0% yield on Treasury bills will be
history. Rolling over the national debt will become a lot
more expensive. Higher rates on Treasuries will work
their way through the debt market, driving up the cost of
money for homeowners, businesses and already struggling
state and local governments.
"The economy over the last six months has been on
a sugar high," says Benn Steil, senior fellow at the
Council on Foreign Relations and author of Money,
Markets and Sovereignty (Yale, 2009), a survey of the
relationship between money and the state. If Congress and
the Obama Administration don't trim deficits, he says,
"we will get to the point where credit is much more
expensive in the U.S. than it ever has been in the past."
Most states are already
having trouble paying their bills and, of course, don't
have printing presses with which to finance their debts.
They are turning to Washington for help and may succeed
in putting some of their liabilities on the federal
balance sheet. With growing off-balance-sheet obligations,
notably unfunded pension liabilities (see graphic in "Debt
Weight Scorecore"), the states will
be competing for years with the federal government for
scarce taxpayer dollars.
"U.S. states are like emerging markets,"
says Reinhart. "They spend a lot during the boom
years and then are forced to retrench during the down
years." Cutting expenses sounds good theoretically,
but look at California: Students (and faculty) are up in
arms over proposed tuition increases and cutbacks at the
state's once prestigious university system; state
employees are mounting a fierce legal battle against
furloughs and other wage concessions.
Mainstream credit analysts are worried. The U.S. has
been able to sell vast amounts of debt because the
Treasury market, with $500 billion a day in turnover, is
considered safe and dwarfs all other debt markets. But
Brian Coulton, head of global economics at Fitch Ratings
in London, warns that once rock-solid economies like the
U.S. and the U.K. could join shakier nations like Japan
and Ireland in losing their aaa ratings if they don't get
their bad habits under control. "While aaas can
borrow in the short term, very high and rising government
debt-to-GDP ratios are ultimately not consistent with aaa
status," Coulton says.
Unchartered Waters
Governments around the world will issue an estimated $4.5
trillion in debt this year, triple the five-year average
for industrial countries.
It's the Total Debt, Stupid
Private banking assets tend to become public problems in
a crisis. By that measure European countries are far
worse off than the U.S.
A FORBES survey of sovereign
credit, taking into account trends in spending and
revenue, economic freedom and the price of the debt
insurance, a.k.a. credit default swaps, ranks the U.S.
number 35 in a class of 85, below Germany, the
Netherlands and China. The cds market is priced to imply
a 3.1% chance of default over five years on Treasury debt.
Other countries are likely to hit the debt wall sooner,
and with greater impact. The U.K., for example, is 38 on
the list, two notches above Slovenia. One culprit is much
higher levels of private banking debt that could land on
the British government balance sheet á la Fannie
Mae ( FNM
- news
- people )
and Freddie
Mac ( FRE
- news
- people )
in the U.S. The sovereign debt of the U.K., plus the
assets of its five largest banks, exceeds 500% of GDP,
compared with 200% in the U.S. Even closer to the edge is
Ireland. Sovereign debt is at 41% of GDP. But total
banking-system assets are another 800% of GDP (see
graph above). If those assets sour, the government
will almost certainly step in to protect the banking
system, as Iceland was forced to do in 2008. Iceland's
currency and stock market collapsed soon thereafter, and
its president recently blocked a law to repay $5 billion-plus
to British and Dutch investors. That move puts at risk a
pending bailout package for Iceland from the
International Monetary Fund and its application to join
the European Union.
Most investors seem to believe, as the late Citibank
chairman Walter Wriston put it, that "countries don't
go bust." The opposite is true. "There was a
massive default wave in 1980s and 1990s," says
Reinhart. Investors may not have paid much attention
since the defaults were mostly in emerging market
countries like Guatemala and Romania. But the deadbeats
included current investor favorites like Brazil, which
defaulted in 1983, went through a bout of hyperinflation
in 1990 and effectively defaulted again, for the same
reason, in 2000. Reinhart and Rogoff show that, on
average, nations add 86% to their debt loads within three
years of a credit crisis. At the same time, government
revenue falls an average of 2% in the second year after
the onset of the troubles (see timeline, below).
The Stumble Cycle
Sovereign defaults--when a country stops paying its bills--go
in waves, often following global financial crises, wars
or the boom-bust cycles of commodities. Some countries,
like Spain and Austria, mend their ways; others, like
Argentina, are repeat offenders.
The combination can be fatal for investors holding
bonds issued by financially shaky countries like
Argentina or Greece, which sell a lot of their debt
outside their own borders (as does the U.S.--45% of all
publicly held debt). As a nation's finances deteriorate,
foreign investors sell their bonds, putting upward
pressure on interest rates. That usually sets off a
spiral including a deteriorating currency, which, if the
bonds are denominated in foreign currencies, makes it
impossible for the country to pay its debt. Greece doesn't
have to worry about this last syndrome, because it uses
the euro. But that might make things worse since it can't
print its way out of its financial difficulties. "It's
like entering a prize fight with one hand tied behind
your back," Bass says. Argentina takes a different
tack. Still struggling in the wake of its 2002 default on
foreign-held debt, its president recently tried, and
failed, to seize central-bank dollar deposits (and
cashier her central banker) in order to repay overseas
debt.
INTERACTIVE ; IS YOUR STATE A
DEBT DISASTER?
Even if countries don't stiff creditors outright, they
can sometimes accomplish the same thing through inflation.
Reinhart and Rogoff found this to be the case in roughly
one-third of the countries they tracked that had currency
depreciation rates above 15% a year, following the 1980-81
recession. Of course, this works only for debt
denominated in the home currency and only if investors
are taken by surprise. If they see inflation and
devaluation coming, they price it into the interest they
collect.
Making money on sovereign defaults isn't as easy as
picking off subprime mortgages. Credit default swaps on
potential basket cases like Dubai, Greece and Ukraine
have doubled and tripled in price over the past 12 months
as their debt loads grew. To buy insurance against a
default in Greece over the next five years costs 3.4% a
year.
How about Switzerland--once considered an impregnable
money center? Credit default swaps on Swiss debt cost 46
basis points (0.46% a year), compared with 33 for the U.S.
The Swiss government is not itself deeply in hock, but it
may have to bail out its private banks in the manner of
Iceland or Uncle Sam. Swiss private-bank debt is seven
times GDP. The U.S. isn't a disinterested bystander: The
Swiss central bank borrowed $40 billion from the Federal
Reserve under a little-known swaps program last year to
remove bad assets denominated in dollars from private
banks. The Fed considers the transaction low risk because
the Swiss promise to repay in dollars. But it signals how
losses on private loans--in this case, U.S. subprime
mortgages--can cycle back into a problem for the Swiss
government. As hedge fund operator Bass notes, a 10% hit
on Swiss banking assets would represent 80% of its 2008
GDP of $488 billion and 400% of annual government revenue.
"You can invest a very small portion of capital, so
if you're wrong it costs very little," says Bass.
"If you're right it can pay hundreds of percent."
Shorting countries comes naturally to Bass, 40, who
has spent most of his career investigating overvalued
stocks and bonds. The son of the onetime manager of the
Fountainbleau Hotel in Miami, Bass grew up in Dallas and
won a diving scholarship from Texas Christian University
in Fort Worth, where he studied real estate and finance.
He spent most of the 1990s at Bear Stearns in Dallas,
attracting a group of well-heeled clients who took his
advice on shorting stocks like Delgratia Mining Corp. of
Vancouver, B.C., which plunged after a highly touted gold
find in Nevada turned out to be a hoax.
Around that time Bass learned
the danger of betting too much on his own research. He
shorted the stock of RadiSys
( RSYS
- news
- people
), a telecom technology maker in Hillsboro, Ore.,
after he called the company's recently departed chief
financial officer at home and was told of possible
financial irregularities. (None was ever uncovered.) Bass
was forced to take steep losses after Carlton Lutz, then
an influential stock promoter, called RadiSys "the
son of Intel
( INTC
- news
- people
)" in his newsletter and the stock doubled. (More
recently the company lost $58 million on revenue of $320
million in the 12 months ended Sept. 30.) "Even when
you do great investigative work and you understand the
accounting, it doesn't matter if you know everything,"
Bass says. "You can still lose a fortune."
Last spring Bass lost $110 million buying credit
default swaps on Portugal, Ireland, Italy and Greece. He
may have been right but too early. He is holding on.
His biggest potential score is in Japan. Government
debt has soared to 190% of GDP from 50% in the mid-1990s,
hitting an estimated $10 trillion in 2009. But because
interest rates are so low, the government paid only 2.6%
of GDP to service its debt in 2008, less than the U.S. at
2.9%.
Yet low rates mask a growing problem for Japan. The
government took in $500 billion in taxes last year, plus
another $100 billion in other revenue that included money
borrowed by a government investment program. But the
Tokyo feds spent $980 billion, including $100 billion-plus
on interest and $190 billion or so it transferred to
regional and municipal governments. That left a $360
billion hole it could plug only by writing more IOUs, on
top of the debt it must roll over each year as bonds
mature.
Today Japan can borrow all it wants from its own
citizens. Over the decades they have dutifully (if
mechanically) piled up a $7.7 trillion cache of savings
they keep mostly in low-yielding bank deposits. Those
savings equal two-thirds of the total household wealth of
Germany, France and the U.K. combined, says John Richards,
North American head of strategy at RBS, who spent the
early 1990s in Japan trying to build a channel for
selling Japanese government bonds overseas (the country
still sells but 6% of its debt to foreigners). "You
ask how would Japan turn into a sovereign debt crisis and
you can't find the trigger," Richards says. "Shorting
the yen because you think there's going to be a rollover
crisis makes no sense at all."
The trigger could be demographics. Japan's population
is aging quickly. Today 22% of Japanese are 65 or older;
in 20 years it will rise to 30% or so (compared with a
current 13% of Americans and 20% in 2030). At the same
time Japan's total population peaked at 128 million in
2004 and has settled into long-term decline.
The Leverage Factor
Total U.S. debt, including banking liabilities, has
soared relative to economic growth over the past 20 years.
The combination means Japan's government pension fund
has become a net seller of government bonds, while the
nation's savings rate has plunged from 18.4% in 1982 to 3.3%
today. When that drops to zero, Japan will be forced to
look overseas for financing--and risks exposing itself to
international rates.
JPMorgan Chase analyst Masaaki Kanno in Tokyo says
that Japanese bonds are in a bubble that could pop in the
next three to five years, as savings rates drop. Even if
the government can somehow keep borrowing at a 1.4%
interest rate, he says, interest expense will rise to
roughly $200 billion by 2019, or 45% of government
revenue, unless it pushes through a big increase in the
national value-added tax.
But those rates are unlikely to hold. For years the
government has been able to replace bonds paying as much
as 7% interest with steadily lower-rate debt. The
favorable rollovers ended in 2007, leaving the government
much more vulnerable if it has to sell debt overseas,
where ten-year rates are two to three percentage points
higher than Japan's. If rates rise past 3%--the scenario
Bass is betting on--interest expense will exceed total
government revenue by 2019.
The process will accelerate if the yen falls and
interest rates rise, prompting Japanese savers to pull
their money from low-yielding bank accounts, which, in
turn, are invested in government bonds. "That will
be the beginning of a vicious cycle," Kanno says,
when "consumers will realize what is happening"
and shift their money to more attractive investments
overseas. Bass thinks the crisis will come sooner. For $6
million he has secured options on $12 billion in ten-year
government bonds that will pay $125 million if Japanese
rates rise to 4%.
"The good news is the wolf's at the door in Japan
and that we in the U.S. have front row seats to see what's
going to happen," he says. "I hope we learn
something from it."
external
debt recorded End January 2010
Country
|
2008Q4
|
2009Q2
|
Change in
percentage
|
|
Austria
|
832,753
|
832,416 |
-0.04% |
Belgium
|
1,354,299
|
1,271,796
|
-6.09%
|
Bulgaria
|
51,456
|
51,811
|
0.69%
|
Croatia
|
54,769
|
57,678
|
5.31%
|
Czech Republic
|
80,428
|
80,074
|
-0.44%
|
Denmark
|
588,776
|
607,375
|
3.16%
|
Estonia
|
26,843
|
25,332
|
-5.63%
|
Finland
|
339,454
|
364,850
|
7.48%
|
France
|
4,935,009
|
5,021,325
|
1.75%
|
Germany
|
5,158,439
|
5,208,468
|
0.97%
|
Greece
|
504,612
|
552,791
|
9.55%
|
Hungary
|
215,265
|
220,295
|
2.34%
|
Ireland
|
2,355,639
|
2,386,612
|
1.31%
|
Italy
|
2,328,235
|
2,567,067
|
10.26%
|
Latvia
|
42,257
|
39,597
|
-6.29%
|
Lithuania
|
32,473
|
32,263
|
-0.65%
|
Luxembourg
|
2,020,065
|
1,994,299
|
-1.28%
|
Netherlands
|
2,461,402
|
2,452,293
|
-0.37%
|
Norway
|
475,919
|
548,104
|
15.17%
|
Poland
|
243,477
|
248,689
|
2.14%
|
Portugal
|
484,710
|
507,002
|
4.60%
|
Romania
|
102,181
|
106,677
|
4.40%
|
Russian Federation
|
480,479
|
475,561
|
-1.02%
|
Slovak Republic
|
52,527
|
63,429
|
20.76%
|
Slovenia
|
54,608
|
53,204
|
-2.57%
|
Spain
|
2,316,545
|
2,409,516
|
4.01%
|
Sweden
|
617,309
|
669,097
|
8.39%
|
Switzerland
|
1,304,956
|
1,338,732
|
2.59%
|
Turkey
|
278,146
|
268,559
|
-3.45%
|
Ukraine
|
101,654
|
100,576
|
-1.06%
|
United Kingdom
|
9,041,357
|
9,087,661
|
0.51%
|
ECB and rating agencies issue warnings on EU debt
ANDREW
WILLIS
Today @ 09:22 CET
A collection of prominent voices warned EU member
states on Tuesday (26 January) about the risks of rising
indebtedness hampering economic recovery and spooking
financial markets.
European Central Bank chief economist Juergen Stark
said the shocking state of public finances could lead to
further credit rating downgrades of government bonds and
ensuing market turmoil. "We are seriously concerned
about forecasts of strong rises in government deficits
and the indebtedness of countries in the eurozone,"
he said in a speech.
Credit rating agency Fitch pointed to the expected
heavy toll of the rising debt levels. On average, nearly
one fifth of national output will be absorbed by debt
costs this year, but in some countries such as Italy,
France and Ireland, it will be about one quarter, said
the agency. "The increase in the stock of short-term
debt is a source of concern to Fitch as it increases
market risk faced by governments, notably exposure to
interest rate shocks," said associate director for
sovereign debt, Douglas Renwick.Following a study of 15
EU countries and Switzerland, the agency found that gross
borrowing this year "in absolute terms is projected
to be largest in France (454 billion), Italy (393
billion), Germany (386 billion euros), and the UK (279
billion)."
However, Italy, Belgium, France and Ireland are
forecast to have the highest borrowing as a percentage of
GDP, all at about 25 percent.
Separately on Tuesday, Spain's finance minister Elena
Salgado told the European Parliament's economic committee
that she wants to see "rigorous and consistent"
enforcement of EU budget rules that limit budget deficits
to three percent of GDP. Spain, currently holders of the
EU's rotating presidency, is estimated to have run up a
deficit of around 11 percent last year.
The warnings come amid concerns the ongoing Greek debt
crisis and strains in other eurozone countries, notably
Portugal and Ireland, are threatening the cohesion of the
16-member euro area. On Tuesday night, Portugal's
Socialist government outlined proposals to bring down the
government's deficit over the course of 2010, without
hampering nascent signs of recovery. The country has seen
considerable pressure from the International Monetary
Fund and credit rating agencies to start implementing
measures rapidly, with latest figures suggesting the
peripheral state's deficit reached 9.3 percent of GDP in
2009, far higher than previously expected. Portuguese
finance minister Fernando Teixeira dos Santos said the
government would cut the budget deficit by one per cent
of GDP this year. "By 2013, we will reduce the
deficit to below three per cent of GDP," he added.
The European Commission is expected to give its
assessment of deficit cutting measures in four EU member
states - Hungary, Latvia, Lithuania and Malta, on
Wednesday. A draft copy of the report, seen by Reuters,
says Hungary and Latvia are on track with their fiscal
cutback programmes, which require the two states to bring
their deficits below three percent by 2011.
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