Portugal Passes Bailout Review – Economy Set to Tank Further

As a result of having shot whatever credibility it may once have possessed over the (still ongoing) Greek debacle, the eurocracy is eager to prove that Greece will indeed remain a 'unique case'. 

As a brief reminder, Greece went from 'no euro are nation will ever be allowed to default' in May of 2010 to '21% haircut and voluntary private sector involvement' (VPSI) in early 2011, to '50% haircut and VPSI' in late 2011 to 'de facto 75% haircut and all private sector bondholders subordinated to the ECB, plus collective action clauses inserted' (i.e., PSI, but clearly no longer 'voluntary') today. As an added twist, no-one knows if that will be enough (on Friday, German finance minister Schäuble reportedly told MP's that a 'third bailout of Greece cannot be ruled out').

In order to sell the second Greek bailout to their increasingly restless constituencies and parliaments, the chief eurocrats have been at great pains to stress the 'extraordinary, never to be repeated case' storyline in the context of the bailout.

They not only worry about their domestic political backing of course, but also about 'locust-dom', to borrow a phrase from ex Italian premier Silvio Berlusconi, this is to say, the congregations of evil speculators that populate financial markets and refuse to buy the bonds of bankrupt governments.

Hence Portugal can not be 'allowed' to cross over the Jordan anytime soon. Never mind that last year, the government only managed to achieve its overly ambitious deficit goals by basically stealing a few billions worth of pension assets from the banks. As readers may recall, Hungary finds itself in hot water with the EU over similar fiscal legerdemain.

This is not to belittle the fact that Portugal has undertaken a number of genuine economic reform steps, specifically with regards to the liberalization of  the labor market. However, anyone with only passing knowledge of the country's economic history should be aware that the Portuguese government has never been able to be anything but fiscally incontinent.

Moreover, were the economic and fiscal facts weighed objectively, it would be crystal clear that the country remains a basket case and is likely to become more of one.

Portugal is therefore lucky that such an objective assessment is currently an impolitic thing to do – the eurocracy urgently needs positive examples that show that its bailout policies can 'work'.

According to Reuters:


Portugal has passed the third review of its 78-billion-euro bailout programme by the European Union and IMF, Finance Minister Vitor Gaspar said on Tuesday, reiterating this year's fiscal goals will be met despite a worsening economic outlook.

"The result (of the evaluation) was positive despite unfavourable conditions. The mission confirmed the fulfillment of the criteria demanded by the terms," Gaspar told a press conference, adding that the inspectors will recommend the disbursement of a new tranche of 14.6 billion euros.

He said an economic slowdown in Europe made the government revise its projection for 2012 economic contraction to 3.3 percent from 3 percent.

Under the bailout, Portugal has to cut the budget deficit to 4.5 percent of gross domestic product this year from a goal of 5.9 percent last year, which was met thanks to a one-off transfer of banks' pension assets to the state.

The terms of the bailout also require that the country show progress on economic reforms, such as changes to its rigid labour laws, to improve competitiveness.

Many economists say the country may have to seek more emergency funding. But European officials have played that down, hoping to differentiate Portugal from troubled Greece.”


(emphasis added)

Portugal's gross external debt amounts to € 372 billion as of end of December 2011, or roughly $ 500 billion. This is nearly $47,000 in external debt per man, woman and child in the country, or roughly 217% of the country's GDP.  The total is only slightly below the total external debt of Greece, while on a per capita basis, is it actually slightly higher. Evidently, even 'small insignificant Portugal' could conceivably capsize the euro Titanic contagion-wise if its crisis were to deepen.

Below are a few economic data points describing the country's economic and fiscal history. Keep in mind that the country's current account deficit is currently mainly financed via the 'TARGET2' stealth bailout mechanism.



Portugal's current account deficit, in millions of euros – click for higher resolution.



Portugal's current account deficit as a percentage of GDP – click for higher resolution.



Portugal's government debt-to-GDP ratio – click for higher resolution.


Portugal's budget deficit as a percentage of GDP, with last year evidently excluding the pension assets theft (with managed to lower the total to 5.9%) – click for higher resolution.



Portugal's GDP growth rate – the economy has been in recession in 10 of the last 15 quarters, with the current quarter the 5th consecutive quarter of economic contraction – click for higher resolution.


Portugal's industrial production, year-on-year percentage change. The most recent decline is accelerating – click for higher resolution.


Portugal's business confidence index is plumbing fresh lows – click for higher resolution.



Portugal's unemployment rate is reaching depression-like proportions – click for higher resolution.



2012 is also an important year as a fairly big chunk of government bonds comes due – it is in fact the second biggest 'debt rollover' year of the next decade.

All the more reason therefore to keep 'market confidence' intact. The market's assessment of Portugal's prospects is usually marked by wild manic-depressive oscillations, with the long term trend continuing to point in the 'wrong' direction, even though the ECB's LTRO extravaganza has kept the lid on this particular boiling pot in the short term.

What isn't quite clear to us is how and why, in view of the above depiction of the country's economic history, its is supposed to escape the fate of becoming a copy of the Grecian death-spiral. Admittedly it is too early to pass judgment on the efficacy of the already enacted and yet to be introduced economic reforms, but last year's pension asset theft can obviously not be repeated. No wonder then that the government has lately been pleading for 'more time' with its bailout lenders. What is also not quite clear is whether the population's willingness to put up with the joys of eurocracy-imposed austerity is imbued with the eternal and abiding patience  that will be required to actually see the process through.



Portugal's annual government bond rollover schedule in billions of euros. 2012 is the second biggest rollover year of the coming decade – click for higher resolution.



Color us unconvinced as to the likelihood that the 'model student' will remain in the troika's and the market's good graces as the year progresses.  We continue to believe that Portugal is the most likely next flashpoint of the debt crisis. As a relatively small country, the resources it has at its disposal to deal with its crushing debt burden are quite limited and the market undoubtedly knows that. 

The fact that it has just passed a troika review of the bailout program may support Portuguese government bonds in the short term, as the biggest worries about this year's debt rollovers should be assuaged. The big question is for how long this state of quietude will last.



Charts by: Tradingeconomics, Der Spiegel



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