Debt Over Debt and the System Revolving Doors

  • Miguel Matos Torres
  • 28 July 2020

European Union governments agreed on an unprecedented stimulus package (worth €BN 750). All this looks fantastic if growth, inflation and employment data remain stable in all European countries.

European Union governments agreed on an unprecedented stimulus package (worth €BN 750) to bind the 27 nations together. All this looks fantastic if growth, inflation and employment data remain stable in all European countries, which is very unlikely.

This package is mainly in the shape of debt that soon will force economies to new debt. Portuguese public debt is the third in the ranking of the EU 27 nations, just surpassed by Greece and Italy. Nothing new here, Portugal has been in the red for years now, with successive governments forcing massive taxation used to pay back creditors. The ratio of “Debt to GDP” has increased and will have a new peak this year (130%). What is not clear, yet, is that the indebtedness does not prevent the Portuguese economy from falling quickly into a financial crisis (again) or even to an economic collapse.

Contrary to the government(s) message, debt is neither free nor irrelevant, also if interest rates are near zero as they are today. Debt means less GDP growth and a delay to the exit of financial problems, namely in indebted countries.

We are not free of this situation, and worst, Portugal is making the same mistakes of the past. The country is falling into a mix of governance problems and a trap of massive government spending. As a result of this during the last years, the interventionist system is not delivering better health, justice or education, areas where the debt should be impactful.

The main problem of the link between the debt resulting from this global stimulus chain is that it will (likely) be entirely to support inflated government spending. The EU response (unlikely) will keep firms further from efficiency. It will not do much to prevent the collapse in jobs, investment, and growth in highly indebted countries. Most businesses, namely small ones with no debt and no significant assets to serve as collateral, some with social value and great potential, are being eliminated and being crowding out by an “army of zombie firms” living in monopolies, polluted by subsidies, corruption, and blackmail games with government and banking.

More than ever, the competences and intelligence of outstanding people are necessary to deal with the approaching loss of sovereignty and freedom. Yes, more debt means less freedom. Freedom has a high price, and, now that the judicial system was starting to get rid of some of the big problems of the economic system, as the case of Banco Espírito Santo.

The role of is group is paramount in the Portuguese economy. It lived in the dome with politicians where a laundry system was in operation. The group was financed itself through the issuance of bonds, bonds sold to companies in the group, which were to sell as savings products to the bank customers, all this with the blessing of ensuing governments. This kind of operations and behaviours should have no room in a healthy economic system.

Today’s signals are on the contrary way; politicians still love populism and hate scrutiny and meritocracy. The bare reality shows us a fertile ground of incentives for a wave of business groups similar to the BES. These groups are highly specialized in squandering the wealth of the countries. Their tools are mainly the lack of transparency in the shape of “asymmetric information”  and “inside information” – valuable commodities in this country – a land with fragile societal structures, with a tendency towards high corruption, and with unprecedented inequalities.

So what? The economic groups are preparing the knives to cut the subsidy package and approaching politicians, who are looking to use the “revolving doors” between legislators, regulators and industries as usual. Regrettably, when the next crash arises, governments and central banks will tell people that another (unprecedented stimulus) package is warranted

  • Miguel Matos Torres
  • Economist, INSOL International Fellow, Insolvency Practitioner and Professor at the Leeds University Business School (UK)