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A woman walks on the symbol for the euro during the inauguration of an exhibition on the 10th anniversary of the currency in Lisbon (NACHO DOCE)
A woman walks on the symbol for the euro during the inauguration of an exhibition on the 10th anniversary of the currency in Lisbon (NACHO DOCE)

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Crisis in Portugal: Why this little PIG(GY) had none Add to ...

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The options for Portugal Portugal has decided to go cap in hand to the European Union and the International Monetary Fund to stave off a default on its debts. But it's in a stickier situation than were Greece and Ireland, and it's not clear how it will all play out.

Unlike Greece and Ireland when they sought a bailout, Portugal has a political void after the defeat of the government's proposed austerity measures led to a pending election. The opposition promised support for the bailout request, but, noted chief economist Carl Weinberg of High Frequency Economics, it's not clear how the EU and IMF can negotiate a plan with a caretaker government.

To date, Portugal, Ireland and Greece, the P, I and G in what the markets have dubbed PIGS (the last in the debt-laden quartet is Spain) have sought help. The entire euro zone has been struggling with this issue, and Germany is a big player because it foots so much of the bailout bill.

Despite the political uncertainty, the European Commission said it would look quickly at Portugal's request, which some project could run to €80-billion or €90-billion, according to reports in The Financial Times and The Wall Street Journal.

"It is uncertain whether Germany, for instance, will agree to disburse funds to a caretaker government without the assurance of strict conditionality in perpetuity," said Mr. Weinberg.

"A bankrupt and illiquid nation needs money and does not have a government empowered to ask for a bridge loan. We are in unexplored territory, and we need to wait for the political masters to figure out how to deal with it ... if they can."

If it's not worked out quickly, Portugal faces a default on April 15, when it must redeem a €4.5-billion bond. There's also a mid-June redemption of €5-billion.

An auction yesterday punished Portugal with high interest rates, making it difficult, if not impossible, to continuing borrowing.

The most likely scenario, Mr. Weinberg predicted, is some type of bridge financing scheme that would see Portugal through the redemptions, meaning an emergency loan of €9.5-billion.

Because Portugal has no other maturities until mid-2012, there's a lot of time to settle Portugal's short-term political and fiscal issues, Mr. Weinberg added, but there's still the risk of a default next Friday, and "quite a lot of things have to go right over the next eight days."

In the euro zone, what happens next? One of the interesting things on the sidelines of Portugal's crisis today is how Spain and Britain rushed to tell the markets they're not next. Big mistake.

Remember that Greece denied up until the end that it needed a bailout. Then Ireland swore up and down it didn't need aid. And until yesterday, when it went pleading to the EU, Portugal had done the same.

Spain's Finance Minister Elena Salgado said in a radio interview today that her economy is "more diversified, more powerful with sound basics, and is much more competitive." That's true, the issues aren't the same. But some of its banks are in a mess, and it's unemployment rate is a stunning 20 per cent.

Britain's Business Secretary, according to Bloomberg News, also pledged that "we're not the next domino" to fall.

"We have a bigger deficit than any of these countries in southern Europe, but we've steered clear of trouble, got low interest rates, lower than German levels, because of the tough action the government has taken on the budget," Mr. Cable said. "We have got to stay there. Maintaining confidence is absolutely crucial. The Portuguese have demonstrated the perils of losing it."

The bottom line here is that when the bond markets decide you've had it, then you've had it. It does not pay to protest too much.

ECB hikes rates The European Central Bank today hiked its policy rate by one-quarter of a percentage point to 1.25 per cent, kicking off what some observers expect to be further increases later this year aimed at fighting inflation despite the extreme woes of several economies.

The rate hike, the first since mid-2008 and the first since the recession among the world's biggest central banks in developed countries, was already widely telegraphed by ECB chief Jean-Claude Trichet. But markets were watching for what he said, and whether there would be a key change in his language, which there was.

"ECB President Trichet took a less hawkish tone in the press conference, not repeating the ECB's strong vigilance (as he stated one month ago)," said economist Benjamin Reitzes of BMO Nesbitt Burns.

"He noted that the rate hike was warranted due to the continued upside risks to the inflation outlook. The ECB wants to ensure that inflation expectations remain well anchored and that there are no second-round effects from the recent above-target inflation rate ... It looks as though the ECB will hold policy steady in May, but nothing is guaranteed beyond then. Considering the sovereign debt turmoil persists and we'll get results from the bank stress tests in June, we anticipate the ECB will be on hold for the rest of [the second quarter] with the next hike coming in [the third quarter]"

Some observers believe a series of rate hikes would further pummel the weaker countries of the 17-nation monetary union amid its mounting debt crisis.

"The fear amongst these smaller European countries which are already on the brink is that a series of rate rises could exacerbate the debt problems being experienced in these countries given that Irish and Spanish problems were caused by large property booms and subsequent crashes," CMC Markets analyst Michael Hewson said before the rate announcement.

"A sustained tightening cycle with rises in interest rates could see a lot of borrowers on variable rate mortgages in Portugal, Spain and Ireland struggle to meet repayments, and have the effect of driving these bad debts higher and causing further fiscal strain in the European banking system."

Separately today, the Bank of England held rates steady despite rising inflation.

The Bank of Japan also kept its benchmark rate steady, and warned of the hit to the economy from the devastating earthquake and tsunami.

RBC eyes sale of U.S. retail operations Royal Bank of Canada is contemplating selling its U.S. consumer and business banking operations, The Globe and Mail's Tara Perkins and Grant Robertson report.

No deal is in place but Canada's largest bank is taking a serious look at its options for dealing with its struggling U.S. lending business.

Royal Bank made its first real move into U.S. retail banking roughly a decade ago, when former CEO John Cleghorn paid $2.3-billion (U.S.) for Centura Banks Inc. At the time that deal, for 241 branches, was the largest foreign acquisition that a Canadian bank had ever made.

But Canadian lenders have long struggled in the U.S. banking market.

Sher-Wood moves production to China Potash and nickel are one thing, but hockey sticks?

Sher-Wood Hockey Inc., maker of the legendary Sher-Wood hockey sticks, is moving what remains of its stick manufacturing activities in Canada to China, The Globe and Mail's Bertrand Marotte reports today from Montreal.

"This is a difficult decision. We have had a presence here [in Sherbrooke, Que.]for more than 60 years," said marketing and product development vice-president Eric Rodrigue said in an interview.

Sher-Wood said it will phase out production of its composite hockey sticks and foam goalie sticks to China, where more than 85 per cent of its products are already manufactured.

Building permits rise, but residential suffers The value of building permits issued in Canada in February rose by 9.9 per cent from a month earlier. But that was entirely driven by the non-residential sector in Alberta and Ontario. In the residential sector, permits plunged 18.3 per cent as Ontario and Quebec led the declines in both single-family homes and multi-unit buildings such as condos.

"Construction intentions for multi-family dwellings fell 34.4 per cent to $892-million in February," Statistics Canada said today.

"This was the first time in a year that the value of multi-family permits fell below the billion-dollar mark. The decline was attributable to decreases in five provinces, particularly Ontario and Quebec," the federal agency said. "The value of building permits for single-family dwellings fell 8.6 per cent to $2.1-billion, following three consecutive monthly gains. The February decrease was a result of declines in six provinces, led by Ontario, Quebec and Alberta."

Given that building permits seem to have peaked in March 2010, said chief economist Avery Shenfeld of CIBC World Markets, "we are looking for a roughly 10-per-cent drop in Canadian housing starts this year versus 2010."

Global trade rebounds World trade has rebounded sharply from the collapse of the recession, but the "crisis hangover" is still troubling, the World Trade Organization says, warning that protectionist measures will continue to take a toll.

Last year, the WTO said in a report today, global exports surged by a record 14.5 per cent as trade volumes claimed back to pre-recession levels. This year, though, growth should slow to 6.5 per cent.

"The figures show how trade trade has helped the world escape recession in 2010," the group's director-general, Pascal Lamy, said in a statement.

"However, the hangover from the financial crisis is still with us. High unemployment in developed economies and sharp belt-tightening in Europe will keep fuelling protectionist pressures. WTO members must continue to be vigilant and resist these pressures and to work toward opening markets rather than closing them."

In Canada last year, trade also rebounded, but levels still haven't reached those of before the slump, Statistics Canda said today.

What is notable in the agency's review is how Canada's reliance on the U.S. continues to narrow, while trade with China and other Asian nations rises.

"The United States' share of Canada's trade (exports and imports combined) continued to fall in 2010, although it remained Canada's largest trading partner," the agency said.

"The United States represented 62.5 per cent of total merchandise trade in 2010, down from 76.3 per cent in 2001. During the same period, Canada's trade with China more than tripled," it said in its annual trade review.

"In 2010, the three main destinations for Canada's merchandise exports were the United States, the United Kingdom and China, unchanged from 2009. Although the value of Canada's exports to all three countries increased over the past decade, the share of exports to the United States fell. During the same period, the other two countries' share tripled, with the United Kingdom increasing from 1.3 per cent to 4.1 per cent while China's rose from 1.1 per cent to 3.3 per cent."

Many sides to corporate tax cuts Who would have thought a little issue like corporate taxes could get so much dander up?

The Twitter world was frantic yesterday over a Globe and Mail article on our front page that said Canadian companies hoarded cash when tax cuts were supposed to be pushing them toward investing more in their operations.

It started when Laval University's Professor Stephen Gordon tweeted that The Globe story contained some methodological errors, and that he would soon write a post for our Economy Lab blog, which we, of course, welcomed, as we do all his fine material.

Union officials retweeted the link to our story. Others, such as Andrew Coyne of Maclean's, got in on the act. So, too, did the esteemed Jack Mintz: "Why journalists should not try to publish unrefereed claims - Stephen Gordon trounces Globe poor analysis."

(Somewhere in all this Rainn Wilson of TV's The Office chimed in with a tweet suggesting that if "Coldplay & Mumford & Sons got in a fight Miley Cyrus would win," which sort of speaks to my point.)

This is not to weigh in on whether corporate tax cuts, so crucial to this election campaign, are warranted or not, only that there are 86 sides to every story and about 10 ways to skin a cat, even if you're not a veterinarian.

Yes, indeed, there are many, many studies (done by honest-to-God economists and refereed) that show cuts to corporate taxes can boost an economy. No one argues those studies aren't out there. But there are, indeed, different sides to the story.

Prof. Gordon's point is that you have to take out the price impact when looking at investment in machinery and equipment, and that, in the given time frame, the loonie was rising, making imported goods cheaper. So, companies could buy more for less. Indeed, he said, real investment climbed at a faster pace than real gross domestic product since 2000.

The professor argued that one shouldn't come to the conclusion that cuts to corporate taxes were the reason. Rather, you need to consider what might have happened without those cuts, and the difference between these would show the impact. To do that, you have to factor in several things in terms of models and statistics, and Prof. Gordon compiled a credible list of studies to back that up.

"Although modelling strategies and data sets vary from study to study, the consensus from the peer-reviewed academic literature is clear: lower CIT rates are associated with investment levels that are higher than what they would have otherwise been."

So, let's skin this cat another way.

Jeffrey Sachs is the director of The Earth Institute, Quetelet Professor of Sustainable Development, and Professor of Health Policy and Management at Columbia University. (He's also committed to fighting poverty and hunger, but he's still a real live professor.) Here's what he told the BBC only yesterday:

"Of course, all of our countries are caught in what you could call a kind of tax arms race or what could be called a race to the bottom in fact, which is that each country is trying to get the tax rate lower than the neighbours or the competitors. The result is that everybody is cutting corporate tax rates around the board.

"It is only causing fiscal crisis everywhere and it's a kind of negative sum game, meaning that when both sides do it, neither gains the advantage relative to the other. In fact both lose by adding to the fiscal pressures and the need to then cut the education spending or the social expenditures that are crucial for making sure that the poor half of our societies can also participate and be productive members of our economies in the future."

He pointed as an example to Ireland, the one-time Celtic Tiger that's now a pussycat on life support and was once the envy of Europe because of its low-tax regime.

"So you sure can make a little bubble in the short term, but it's not really building the long-term platform for prosperity. Second, I wouldn't say it to Ireland alone, I would say to the European Union, the United States, Japan, other high income countries, indeed in the G20 as a whole. Let's stop this horrendous process where we are being gamed by global companies that are playing off our governments, one against the other and ending up by depriving ourselves of the productive base of our societies which after all are our skilled and educated work forces."

And then there's Peter Fisher, Professor Emeritus of Urban and Regional Planning at the University of Iowa and Research Director of the Iowa Policy Project in Iowa City. He's got a PhD in economics, and has written a few books, one published by the Economic Policy Institute.

He studied corporate taxes and the impact on state economic growth. To make a long study short, here's what he found, and he cited 23 references:

"Proponents of business tax breaks claim that taxes are a significant factor in the location choices of businesses, and that a state can tax-cut its way to economic growth and generate tax revenue in the process. As we will see, there are good reasons to be skeptical of such a claim, and several decades of research on the relation between state taxes and growth confirm that such claims are vastly overblown and sometimes completely misleading. Business tax breaks turn out to be an expensive and inefficient way to attempt to stimulate a state economy.

"Some have pushed the argument even further, proposing elimination of corporate income taxes altogether. There is a strong case, however, for state taxation of corporations. Corporations doing business in a state benefit from the investments that state government has made in education, infrastructure and public safety services. Government is responsible for educating workers and the children of those workers, and for building, maintaining and policing the roads that businesses rely upon."

Tweet that.

In Economy Lab today

It's one of Canada's enduring myths: Every generation, a new wave of immigrants arrives. They start out poor, living in Canada's Little Italies, Little Portugals, Little Everythings. Eventually, when they become more affluent, they move up and out to the suburbs, becoming integrated into ethnically diverse communities. Frances Woolley takes a close look.

In Personal Finance today

Whatever your branch recommends, be wary, do your homework and ask for alternatives, Rob Carrick suggests.

In this excerpt from Essential Tax Facts, author Evelyn Jacks provides a quick review of this year's tax return changes.

When filing taxes, students can take advantage of deductions and credits for transit costs, loan interest, moving expenses and more. Angela Self explains how to do it.

From today's Report on Business

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