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ECONOMY: East Timor Extends a Hand to Troubled Portugal

Mario de Queiroz

LISBON, Nov 16 2010 (IPS) - With the announcement that his country is ready to buy Portuguese debt, the president of East Timor, José Ramos-Horta, set a precedent in international economic relations that was universally praised in political and financial circles in this southern European country.

The president of one of the poorest countries on the planet, whose per capita income of 600 dollars ranks it 130th in the world, offered a hand to its former colonial power to help it weather the financial crisis.

“I don’t see difficulties for East Timor, in terms of buying Portuguese debt,” Ramos-Horta said Sunday on a visit to the former Portuguese enclave of Macao in China, where he announced that the government of Prime Minister José Alexandre Xanana Gusmão had decided to diversify investments by East Timor’s petroleum fund.

The oil fund was established by the government in 2005 to receive and distribute billions of dollars in tax revenue from emerging oil and gas projects in the Timor Sea, with the aim of ensuring the proper distribution of the earnings.

The president added that other investments could be made in highly successful public or quasi-governmental enterprises that guarantee high returns, such as companies in telecoms or renewable energy, an area in which Portugal is a world leader.

On Monday, State Budget Secretary Emanuel dos Santos described Ramos-Horta’s announcement as “a gesture of friendship.”

According to initial projections, East Timor’s investment in Portugal, slated for next year, could total one billion dollars.

However, the Diario Económico newspaper of Lisbon put the amount at 700 million dollars, because the East Timor oil fund is worth around seven billion dollars and by law, 90 percent of the assets must be invested in U.S. Treasury bonds.

Other positive news for the economy of Portugal, reported Monday, comes from another former Portuguese colony: Brazil.

South America’s giant plans to make major future investments in Portugal — following in the footsteps of Angola, another ex-colony, which holds shares in Portugal’s biggest oil company, the privatised Galp Energia.

Oi, Brazil’s biggest phone operator, is getting ready to buy an up to 10 percent stake in Portugal Telecom, the largest private business in the country, in 2011.

Next year, Portugal Telecom will be on the board of Oi, and it is then that Brazil plans to acquire a minority stake, estimated at 1.19 billion dollars, in the Portuguese firm.

The planned investments by East Timor and Brazil — the poorest and most powerful economies in the Portuguese-speaking world, respectively — have come just when this EU country is in the midst of a severe crisis, with the International Monetary Fund (IMF) warning on an almost daily basis that the country is on the verge of bankruptcy.

Certainly in a country with a GDP of 233.4 billion dollars and a public debt of 198.6 billion dollars, measures like those planned by Brazil and East Timor will not solve the bulky fiscal deficit, which stood at 9.3 percent in 2009 and is projected at 8.4 percent in 2010.

But they are seen as important injections into the Portuguese economy, and in the case of East Timor, there is also a strong symbolic aspect.

Economist and journalist Helena Garrido, one of the country’s leading economic analysts, warned in the Jornal de Negocios business newspaper that Portugal should gear up for “a 2011 that will be much worse than people now imagine.”

As if the situation were not dire enough, Germany and France threw more wood on the fire, with remarks about more restrictive rules in the future on aid to EU countries that find themselves in financial trouble.

If Ireland, currently the country most targeted by speculators, capitulates and turns to the European Financial Stability Fund (EFSF) for aid and the IMF dictates terms to Dublin, Portugal will be next on the list and will have to prepare for the worst, according to financial publications in the EU.

That prospect was acknowledged for the first time on Monday evening by Finance Minister Fernando Teixeira dos Santos, who admitted that there is a high risk of Portugal turning to the EFSF.

However, the problem is not only Portugal’s, but has to do with “the stability of the entire Eurozone,” he stressed.

In effect, the repercussions would go beyond this small country of 10.6 million people. A bailout for Ireland would give rise to a serious danger of a domino effect involving Portugal, Spain and Italy, and possibly a relapse in Greece, which was the immediate origin of the current wave of turmoil in the EU.

According to Garrido, “in an attempt to please voters,” German Chancellor Angela Merkel and French President Nicolas Sarkozy “created the risk of exhausting the EFSF.”

If Spain fails to hold out and Germany and France continue to insist “on a facile discourse aimed at winning votes, the euro will experience the worst possible nightmare,” she predicted.

“Politically, the pressure put on Ireland last weekend fuels the mistrust among the countries of the Eurozone, contributing nothing to the cooperation that is essential today in order to overcome the threats looming over the monetary union,” the analyst said.

University of Lisbon economics professor Mario Olivares told IPS that there are two main hurdles standing in the way of debt relief for many countries.

In first place, “the countries that should relieve the debt burden don’t want to do so,” he said. “The wealthy in the developed world, such as the 500 companies that represent nearly half of the entire planet’s GDP, should spend on the treasury bonds in several countries, to lower the risk.

“China, which has one-third of the world’s liquid reserves, isn’t doing so, or does so drop by drop, following a geoeconomic strategy,” the academic said.

The second factor “is that as a profession, economists educated in the last 20 years have stopped studying macroeconomy; although they do study something they call ‘macroeconomy’, it is actually a conglomeration of companies, whose behaviour is treated as if they were a rational individual…which only spends what it has — something that is true for an individual, or a family, but not for a country.”

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