2010–14 Portuguese financial crisis

The Great Recession in Portugal^[1][2] led to the country being unable to repay or refinance its government debt without the assistance of third parties. To prevent an insolvency situation in the debt crisis Portugal applied for bail-out programs and has drawn a cumulated €79.0 billion (as of November 2014) from the International Monetary Fund (IMF), the European Financial Stabilisation Mechanism (EFSM), and the European Financial Stability Facility (EFSF).

Greece and Ireland also went into a debt crisis in 2010. Together these debt crisis of these three countries marked the start of the European sovereign debt crisis.

Causes

From 2005 to 2011, José Sócrates of the Socialist Party (PS) was the prime minister and the leader of the Portuguese Government.

Anxiety on financial markets

Prime Ministers Pedro Passos Coelho, from Portugal (left) and Rodriguez Zapatero, from Spain (right), in October 2011 - with economic downturn and a rising unemployment rate (over 10% unemployment rate in Portugal and 20% in Spain by 2011), the two countries of the Iberian Peninsula were trapped right in the middle of the European sovereign debt crisis.

After the financial crisis of 2007–2008, it was known in 2008–2009 that two Portuguese banks (Banco Português de Negócios (BPN) and Banco Privado Português (BPP)) had been accumulating losses for years due to bad investments, embezzlement and accounting fraud. The case of BPN was particularly serious because of its size, market share, and the political implications - Portugal's then current President, Cavaco Silva, and some of his political allies, maintained personal and business relationships with the bank and its CEO, who was eventually charged and arrested for fraud and other crimes.^[3][4][5] In the grounds of avoiding a potentially serious financial crisis in the Portuguese economy, the Portuguese government decided to give them a bailout, eventually at a future loss to taxpayers.

In the opening weeks of 2010, renewed anxiety about the excessive levels of debt in some EU countries and, more generally, about the health of the Euro spread from Ireland and Greece to Portugal, Spain, and Italy. In 2010, PIIGS and PIGS acronyms were widely used by international bond analysts, academics, and the international economic press when referring to these under performing economies.

Some senior German policy makers went as far as to say that emergency bailouts to Greece and future EU aid recipients should bring with it harsh penalties.^[6]

Robert Fishman, in the New York Times article "Portugal's Unnecessary Bailout", points out that Portugal fell victim to successive waves of speculation by pressure from bond traders, rating agencies and speculators.^[7] In the first quarter of 2010, before pressure from the markets, Portugal had one of the best rates of economic recovery in the EU. From the perspective of Portugal's industrial orders, exports, entrepreneurial innovation and high-school achievement, the country matched or even surpassed its neighbors in Western Europe.^[7] However, the Portuguese economy had been creating its own problems over a lengthy period of time, which came to a head with the financial crisis. Persistent and lasting recruitment policies boosted the number of redundant public servants. Risky credit, public debt creation, and European structural and cohesion funds were mismanaged across almost four decades.

In the summer of 2010, Moody's Investors Service cut Portugal's sovereign bond rating down two notches from an Aa2 to an A1^[8] Due to spending on economic stimuli, Portugal's debt had increased sharply compared to the gross domestic product. Moody noted that the rising debt would weigh heavily on the government's short-term finances.^[9]

Austerity measures amid increased pressure on government bonds

In September 2010, the Portuguese Government announced a fresh austerity package following other Eurozone partners, through a series of tax hikes and salary cuts for public servants. In 2009, the deficit had been 9.4 percent, one of the highest in the Eurozone and well above the European Union's Stability and Growth Pact three percent limit. In November risk premiums on Portuguese bonds hit euro lifetime highs as investors and creditors worried that the country would fail to rein in its budget deficit and debt. The yield on the country's 10-year government bonds reached 7 percent – a level the Portuguese Finance Minister Fernando Teixeira dos Santos had previously said would require the country to seek financial help from international institutions. Also in 2010, the country reached a record high unemployment rate of nearly 11%, a figure not seen for over two decades, while the number of public servants remained very high.

On 23 March 2011, José Sócrates resigned following passage of a no confidence motion sponsored by all five opposition parties in parliament over spending cuts and tax increases.^[10]

In the first half of 2011, Portugal requested a €78 billion IMF-EU bailout package in a bid to stabilise its public finances.[128] These measures were put in place as a direct result of decades-long governmental overspending and an over bureaucratised civil service. After the bailout was announced, the Portuguese government headed by Pedro Passos Coelho managed to implement measures to improve the State's financial situation and the country started to be seen as moving on the right track. This also led to a strong increase of the unemployment rate to over 15 per cent in the second quarter 2012 and it is expected to rise even further in the near future.[129]

Economic Adjustment Programme for Portugal

Re-access to financial markets

A positive turning point in Portugal's strive to regain access to financial markets, was achieved on 3 October 2012, when the state managed to convert €3.76 billion of bonds with maturity in September 2013 (carrying a 3.10% yield) to new bonds with maturity in October 2015 (carrying a 5.12% yield). Before the bond exchange, the state had a total of €9.6 billion outstanding notes due in 2013, which according to the bailout plan should be renewed by the sale of new bonds on the market. As Portugal was already able to renew one-third of the outstanding bonds at a reasonable yield level, the market now expect the upcoming renewals in 2013 also to be conducted at reasonable yield levels. The bailout funding programme will run until June 2014, but at the same time require Portugal to regain a complete bond market access on September 2013. The recent sale of bonds with a 3-year maturity, was the first bond sale of the Portuguese state since requesting the bailout in April 2011, and the first step slowly to open up its governmental bond market again. Recently the ECB announced they will be ready also, to begin additional support to Portugal, with some yield-lowering bond purchases (OMTs), when the country regained complete market access.^[11] All together this bodes well for a further decline of the governmental interest rates in Portugal, which on 30 January 2012 had a peak for the 10-year rate at 17.3% (after the rating agencies had cut the governments credit rating to "non-investment grade" -also referred to as "junk"),^[12] and as of 24 November 2012 has been more than halved to only 7.9%.^[13]

Rejection of Austerity Conditions and Political Crisis

In the parliamentary elections of October 2015, the ruling right wing party failed to achieve an operating majority. An anti-austerity left wing coalition was formed achieving 51% of the parliamentary vote. However, the President of Portugal refused to allow the left wing coalition to govern, handing allowing the minority right wing government to continue in office. In November 2015 the minority right wing government lost a vote of no-confidence, and asked that the country's constitution be changed to allow new elections to be held as soon as possible (rather than wait the constitutional 6 months). Because of the political conditions of the bail out package the financial crisis has spread to being a political crisis, and is ongoing.

Key economic data

- Budget deficit in 2014 was 7.2% of GDP, 4% beyond the limits agreed in the Maastricht Treaty and 2.5% worse than in 2013 - In 2014 Portuguese GDP was $229 billion up by about 2% from 2013, but still well down from the GDP of the period 2007-2011 and down by about 15% from 2008 - In 2014 Portugal registered a 10-year sequence of continuous increases in debt to GDP ratios. The debt to GDP ratio actually doubling in the last 10 years - In 2014 combined sovereign and personal debt in Portugal was a Eurozone record of 380% of GDP - In 2015 the unemployment rate was 11.9%, over 4% above the last 30 year average - The financial crisis with the bail conditions of austerity have created a political crisis in the country.

See also

• European sovereign debt crisis
• Economy of Portugal
• Economic history of Portugal

References