Ladies and Gentlemen: The 17th Member of the Circle of Hell
by Martin Denholm, Senior Editor
Wednesday, July 14, 2010
On Friday, December 31, 2010, the tiny Baltic state of Estonia won’t just bid farewell to 2010. It will say goodbye to its currency, too.
As the champagne corks pop at midnight, it will be a case of “out with the old” (the Estonian kroon) and “in with the new” (the sad-sack euro) as Estonia will become the 17th country to jump into the Eurozone – a.k.a. the Circle of Hell.
I know what you’re thinking: Why on earth would anyone want to join the Eurozone and its trainwreck single currency at the moment? As a British native, I’m sure glad the U.K. isn’t part of the Eurozone mess at the moment. (It’s not like we don’t have our own massive debt problems anyway.)
But the formal announcement of Estonia’s Eurozone entry comes after a lengthy qualifying process to determine whether it’s worthy (which was presumably stricter than the requirements for Greece and Portugal. More on the latter in a moment.) The entry requirements included debt and deficit levels, inflation, currency stability and interest rate trends.
Estonia, with a population of just 1.3 million people, joins heavyweights like Germany, France and Holland in the Eurozone, plus beaten-down nations like Spain, Portugal, Ireland, Greece and Italy. Belgium, Austria, Finland are also part of the Eurozone.
From the warm welcome of Estonia into Europe’s single currency, we cross to a nation that many would like to see booted out of the 16-nation bloc – the country that put the “P” in the “PIIGS”…
Moody’s Takes a Pop at Portugal
As if confidence in Portugal’s economy and ability to manage its finances and financial obligations weren’t deflated enough, Moody’s just delivered a swift kick to the country’s cojones.
The ratings agency just cut Portugal’s credit rating from AA2 to A1 – a two-level decrease.
The move comes as no surprise, given Portugal’s heavy debt-load (77% of national GDP) and a poor GDP growth outlook that saw its GDP estimate hacked from 0.8% next year to just 0.2%. Keep in mind that Portugal’s economy reversed by 2.7% last year.
Still, Moody’s view isn’t as bad as Standard & Poor’s, which rates Portugal two grades lower (A-).
So with a fresh credit downgrade now hampering Portugal’s efforts to raise money, the country could well face another round of famous austerity measures.
So far, Portugal’s Socialist government has chopped 5% off public sector salaries – just one line of attack, aimed at cutting the deficit from 9.4% in 2009 to 7.3% this year and 4.6% in 2011.
In addition to the pay cuts, Portugal is employing a similar tactic to the U.K. – raising the VAT rate. It also plans to hike income taxes for people making more than 150,000 euros ($188,712) a year and slash military spending by 40% within three years.
Best regards,
Martin Denholm
Related Investment U Articles:
- When One Vote is Worth 15 Billion Euros
- The PIIGS Are Getting Sloppier… Here’s How to Clean Up
- What European Crisis? German GDP Growth Hits a Quarterly Record
- European Sovereign Debt Contagion Continues to Spread
- Alan Greenspan: The Eurozone is Set to Fail
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