portugal and the debt crisis

[Jeff G.]

You think the govt will raise taxes on "luxury" goods like wines to help fund their out of control debt?

If they go bankrupt, anybody hazard a guess at what'll go on in the port industry?

[oscarquevedo]

Jeff, in Portugal wine is not considered luxury, it's part of the meal like bread, potatoes or meat. The VAT class for wine changed, maybe one decade ago, from reduced to intermediate. The VAT for wine is now 13%, which compares with the normal rate of 23%. Portuguese drink over 40 liters of wine, per capita, per year . It is part of the culture and I don't think any government dares to change it. Besides this, the area of vines in Portugal, relatively to the total area of the country, is one of the biggest in the world, if not the biggest. So many people depend on the grapes and wine production to survive.

The question of bankruptcy, which I think it is very much improbable due to the fact that Portugal is a member of the European Union and adopted the Euro currency, would affect the finances of Port companies, specially those relying more on bank credit. You probably know some that were taken over for non-Port related folks or those making long-run investments during last years.

Now if you ask me, will prices go down? I don't know. My perception is that prices are quite stable, but you never know when someone pull the trigger.

[John E]

This is a very good question, and may be answered in any of several ways.

The first, and simplest, would be to see what effects previous political-economic crises in Portugal have had on the Port industry. Not knowing much about modern Portuguese history, the only thing I can suggest is looking at the era of the mid-1970s, when Portugal went through the revolution that ended the dictatorship and transitioned to democracy (with a near miss Communist revolt, if I remember correctly). The Port industry seems to have survived. It also made it through the Depression and world wars. The Port industry seems to be pretty durable.

The next, but less simple way, would be to look at the economics of Port. I'm guessing here, but I would imagine that most Port is exported--certainly most of the more expensive Ports, such as the good rubies and tawnies as well as the vintages, likely go abroad and bring in most of the industry's revenues. If Portugal descends into a financial crisis, the question will be if foreign demand drops; assumng that most Port-consuming countries would not be greatly affected by a Portuguese crisis, there is no reason to believe that foreign consumption and industry revenues would take a major hit.

The most complicated answer would rely on forecasting a Portuguese crisis's effect on the euro. If the Portuguese crisis were part of a wider, general euro crisis (with Spain, Italy, and Greece), then we might see a drastic decline in the euro. That's good news if you buy your Port in dollars or pounds--you will see a price drop! But don't get too excited--Port that has already been shipped won't be affected. A bottle that is already in New York, for example, will be priced according to what the importer paid and what local demand determines; only Port produced and shipped during the crisis will be cheap. Once the crisis passes and the euro (or new Portuguese currency) stabilizes, prices will move to wherever international supply and demand determines, as it does today. Bottom line: you might get cheap ruby for a short time.

Will the industry go under? Probably not. This is an industry that has endured a lot over the centuries, there is a lot of Port still in the barrels in Portugal, and sales will provide revenues to get the producers through a crisis.

[Jeff G.]

To things not affected, that's not necessarily true.

There will be strikes, possible taking to the streets like Greece.

The internal transportation within the country could potentially shut down. You may not see it in hindsight, but I would hazard a guess that when portugal underwent the revolution there was nothing being shipped out of the country.

No doubt portugal will eventually be bailed out by what is in essence the German powerhouse and the ECB, the Euro may slide a little but you realize that the US still maintains a very very loose monetary policy.

With our own record breaking deficit, free flowing money, 2 wars, various natural disasters, internal high unemployment, social liabilities, the dollar is certainly not looking any stronger.

I'm personally worried that if there is a train strike that I would have to hike to Porto!!! Do the european cars run on wine? =)

[Tom Archer]

Portugal does not appear to be the most critically affected of those members of the eurozone who are suffering the consequences of the single currency's inflexibility; but that doesn't mean that all is rosy and under control.

The Greek government did an immense about turn on economic policy, and it is still far from certain that they will in fact succeed in emerging from the crisis without defaulting on their sovereign debt. Importantly, the Greek government has yet to face the electorate since the crisis erupted.

Ireland accepted an EU bailout, and subsequently went to a general election. This resulted in one of the most crushing defeats of an incumbent government in recent european history.

Now the Portuguese government is seemingly deadlocked. There is no agreement on measures that will avoid the need for a bailout, yet no Portuguese politician wants to embrace the idea of an EU rescue package, having seen the electoral calamity that resulted in Ireland.

Portugal is not alone in having a political deadlock - Belgium has become ungovernable since an election nearly a year ago, and is sleepwalking toward financial calamity.

It is hard to see how these issues can be resolved without either a wholesale centralisation of eurozone budgets, debt and taxation, which would be fiercely resisted in countries like France and Germany; or the fracture of the eurozone itself - a much simpler process than the europhiles will concede.

The natural progression of this crisis does suggest a situation where sovereign states within the eurozone start breaking with the ECB, and euros from different nations start having different values; thereby allowing the economic stresses that have built up over the last decade to be relieved.

The likely outcome would be a fall in the value of the Portuguese euro, which would be good for winemakers seeking to export; but a rise in domestic interest rates, which would be bad for those nursing high levels of personal or commercial debt.

- We can only wait and see..!

Tom

[Jeff G.]

I was thinking just that Tom,

With alot of the smaller wineries and even larger ones getting into the leveraging game (especially since current market loan rates are still near historic lows) and counting on the loan money to fund current and near future productions like they do in the states, I'd imagine the declaration of bankruptcy in portugal would be catastrophic to these wineries that don't have any sort of legitimate cash reserves on hand.

Times of war is different then in the modern era where a country simply runs out of money. Would we perhaps see an even larger consolidation of the market?

Would we eventually end up where the TFP and Symington's end up owning 90% of vineyards in portugal?

[Rune EG]

I would like to comment partly on general terms, and partly for the port business.
Abt 6-7 months after the financial crisis hit the world Sep-Oct 08, the international steel prices sold by the steel mills fell by abt 40-50 %. Too many steel mills had geared their whole set-up on full or near-full production. Many other industries faced the same challenge.
When an industry is being hit by a reduced volume in the total market, then it is normal to see a fight for the remaining market volume. Then the prices are going down, unless:
- all actors reduce their volumes at the same time (unlikely)
- all actors accept to have a reduced volume
- the market is in some way regulated by either official and internal trade regulations (port?)

During a visit to Portugal in May 09, I had the opportunity to discuss the new financial situation for the wine / restaurant markets with several restaurant managers in Beiras, Porto, Douro and Alentejo, and in general they all said that the market was down abt 30 % in volume for all types of wine. Met six wine producers in Douro and Alentejo on the same journey, and they also mentioned this level. Later visits to Portugal have proven that the situation has not improved since that time.

It seems now that more than half of the port producers have taken serious steps into the Douro wine market, and that is where they get the cash flow. Short time from production until being sold. If the restaurants and total volume of wine in Portugal is down abt 30 %, then that will hit many of the port producers (unless they manage to increase market shares for Douro wines and thereby maintain the volume in no. of bottles).

I am sure that the debt situations amongst the port producers are spread out on the whole scale from zero to nearly 100 %. Some of these producers will have lack of cash, and either decided by them or by their bank; they must turn a larger volume of their stock into cash in order to be in compliance with their loan agreement. Example: In Denmark there has since autumn 2010 been a huge sale of Burmester Colheitas / tawnies back 1937 and some younger vintages. The Danish importer is stating the following on their web site (translated):
“The economical situation in Portugal has given us the opportunity to purchase at extremely beneficial terms. The prices are far away from what it really costs producing these nice wines”. Although the exact no. of bottles purchased by the Danish importer is unknown, there have been speculations that the figure is 6-digit.

I will stick my neck out and make the following guesses / estimates:
- The port industry will stick together and try to maintain the price levels as long as possible, and I think they will succeed to a great extent
- There will be port producers having huge financial problems when the reduced volumes are giving long term effect. For some time everyone can live on reserves. But at one stage reality makes things happen
- Result of the second item above will be that from time-to-time we will see significant “stock sales”, as above for Burmester in Denmark

Another posibility will be mergers and an oligopoly developing with few companies controlling everyhting. That may happen, but before reaching that stage, we will on the way experience as per my third item above.

[Jeff G.]

Possible change of govt from a parliamentary vote by eod today!

[Eric Menchen]

If the Portuguese crisis were part of a wider, general euro crisis (with Spain, Italy, and Greece), then we might see a drastic decline in the euro. That's good news if you buy your Port in dollars or pounds--you will see a price drop! But don't get too excited--Port that has already been shipped won't be affected. A bottle that is already in New York, for example, will be priced according to what the importer paid and what local demand determines; only Port produced and shipped during the crisis will be cheap.

I have found this not to be true in at least one case. I purchased from a well know merchant that stated he had lowered his prices on existing stock because of changes in exchange rates. Yes, he had already purchased these bottles at less favorable rates, but the market and replacement costs were now lower. I'm not saying this will always happen, but it can happen.

[Eric Menchen]

http://www.guardian.co.uk/business/2011 ... ost-uk-3bn