The Portugal Mess

Finland is currently facing one of the most difficult government formation talks in decades and the greatest issue on the table is the EU bailout of Portugal. Majority of the current Parliament wouldn't accept the package in its current from. Of the three parties slated to form the government only the national coalition(Kokoomus) is in favor of the package while the Social Democrats and True Finns are against the package. Its a difficult and complex issue to resolve, if not even impossible.

At the core the issue is pretty simple, for the past few years the Portuguese governments have been spending more money than they had and to plug the deficit they borrowed from investors around to the world money. The global financial crisis not only rocked the Portuguese economy, making the deficit even larger and making repaying the loans difficult, but also made the debt markets more wary of investing in at risk economies making borrowing even more difficult. Now Portugal is in a situation where it has a massive budget deficit, ailing economy and no money the repay the existing loans.

The EU package is meant to take some of the burden of the Portuguese by borrowing money at cheap interest rates to it and by guaranteeing its loans to the investors, this means that if Portugal can't meet its obligations someone else will pick up the bill. Another logical way out of this mess is for Portugal to cut its deficit. This option however is politically intolerable, since the cut backs would have a devastating effect on the welfare system, that is now needed more than ever in the ailing Portuguese economy. The human cost of the cut backs would be high as poverty amongst the portuguese would without a doubt increase.

Another aspect of the crisis is investors responsibility. For financial markets to work properly investors who make stupid investments need to penalized. Constant bailouts would encourage investors to make high risk high return investments with impunity. It would effectively privatize good investments and socialize the losses. This is not how a free market economy should work, if you make risky investments you reap the losses as well as the profits.
But again this to simplifying a complex issue. It is good to remember who the much maligned investors actually are. They are not some cabal of rich white guys living in luxury mansions, they are ultimately you and me. The largest investors in the world are various pension, social security and insurance funds. Funds which provide vital services to our society. It might that your pension money has been borrowed to the Portuguese Government. Losses would hurt these funds that are so vital to our welfare.

The other much maligned institution in this mess is the bank. Banks have been borrowing money to the portuguese as well and again the ones who suffer is not the cabal of rich white guys, but you and me. A large chunk of the money that the banks lend to others come from deposits made by the public, meaning that it is your money that is on the line. More critically banks provide the critical financial infrastructure that keeps our economies together. I have seen first hand what happens when that financial infrastructure is momentarily shaken and it wasn't pretty. Imagine what would happen if your credit card no longer worked and your internet bank would be there either. You would be pretty much fucked. Therefor we cannot just let the banks collapse at will because the effect on our society would be simply but devastating.

My solution to this monumental problem would be to construct a massive CDS(a Credit Default Swap for those who don't speak finance), where the EU would guarantee Portugal's loans against a fee that would correlate the default risk. The fee would be collected from the investors who wish to secure themselves against default. The fee money could be used to help the people of Portugal, by investing it in to the Portuguese economy. The condition for this could be that Portugal makes an effort to cut spending and reduce the deficit.