FinancialGuy Writes!

Oh dear. The financial problems in Portugal now look set to need a rescue package from the EU and IMF. With the resignation of Prime Minister Socrates after the latest round of austerity measures were blocked, there now seems nowhere for the country to go but down.

Why any politician would want to force their country into a bailout is beyond my comprehension.

This is such a shame. One of the benefits – if there is such a thing – of Greece and Ireland needing financial rescues is that it has bought more time for other nations to try and sort their finances out while the spotlight shines elsewhere.

This has certainly been the case in the UK. I can clearly remember being at a conference in Brussels about finance where the UK was listed as one of the three most at risk economies in Europe. And yet now, an election, a coalition and some very stern public spending cuts later, the UK has been held up by the likes of the IMF to be doing a good job.

In the UK, the two Eds of Miliband and Balls have been very critical about the speed of the public sector spending cuts. It appears that in Portugal this is the issue as well. (I do have a few Portugese contacts and they tell me that first three rounds of cuts have already been very harsh). From things I read, I have the impression that despite a bailout, Greece is still not making the progress that might be required leading to the thought of a default next…

The real question though, is how fast should these cuts be made?

Of course, that is not for me to say. Every situation is different.

However, it is worth pointing out that bankruptcy does not happen slowly. Sure, the problem that causes the bankruptcy can take years to build as a person, company or government slowly spends more than their income each month and year. But when it arrives, it arrives quickly.

Cast your mind back to the credit crisis of September 2008 and you may remember that Bear Sterns and Lehman Brothers both collapsed over weekends. In other words, they knew that there would not be the money available to remain in business when the doors were meant to open on Monday morning.

Both firms, especially Lehman, had been expanding rapidly until just weeks before their falls. Confidence was high and rising. And then it stopped. And herein lies the rub.

Borrowed money is all about confidence. The confidence that a lender has that a borrower will repay the debt. When the confidence is gone, it is gone and future debts will likely not be renewed.

In the case of Bear and Lehman, they had such large amounts of short-term debt that tests of confidence needed to be passed every day.

This means that the pressure really is on governments to slash deficits and borrowing levels as soon as is possible. Whether they can cut fast enough is one thing, but they all know that too slow really cannot be an option.

Thus, if the safety and independence of a nation is up for grabs, can politicians really complain about cuts being too fast??? It seems – at least in Portugal – that they can, and that we are about to see the full implications of ‘too slow’.

Author :