Walk the streets of any Portuguese city and sooner or later you will come across a scene that seems unchanged for decades: shoe-shiners on Lisbon’s Avenida da Libertade, elderly ladies hanging laundry from tumbledown balconies in old Porto or fish sun-drying on the beach in Nazaré. One of Europe’s most unassuming and introverted countries, Portugal is a place where the past is gazed upon with a sense of melancholy – until, of course, the past comes back with a bite.
Since late January, Portugal has taken a battering on international markets, as its bond prices have plunged and ratings agencies have threatened to cut the country’s credit grade amid fears over rising budget deficits and high public debt. It is a tale that has also recently been told elsewhere in the euro-zone: Greece, Ireland and Spain have taken a similar lashing. But there is one important difference: Portugal has been here before, and not that long ago either.
When Prime Minister José Sócrates came to power in 2005, he inherited an economy barely growing after a lonesome recession in 2002 and 2003 even as other European economies raced ahead and Iberian neighbour Spain boomed. Years of economic mismanagement and one of Europe’s largest armies of civil servants had racked up a budget deficit equivalent to 6.1 percent of GDP. Brussels was breathing down Portuguese officials’ necks and threatening sanctions for surpassing the euro zone’s 3-percent ceiling.
Sócrates, a young, sharp-suited politician portrayed in the international media as a dashing left-of-centre neophyte intent on dragging Portugal into the future, promised to get the economy back on track. And he succeeded up to a point.
Deficits 1.0 and 2.0
Helped by his Socialist Party’s majority in parliament, Sócrates managed to cut the deficit to 3.9 percent by the end of 2006 and to below the 3-percent cap in 2007 and 2008. Portugal finally appeared to be on the right path as economic growth picked up, unemployment declined and the prime minister basked in the glow of high approval ratings.
Then disaster struck. The credit crunch and international financial crisis that began in the United States crashed onto Portugal’s Atlantic coast, the economy faltered and much of the progress made in the prior years was swept away as investors turned tail, layoffs soared and the economy dipped into recession once more.
Elevated spending in the 2009 budget – Sócrates insists the outlay was for “investment” not “stimulus” – and miscalculations about economic growth caused the deficit to balloon to 9.3 percent of GDP. That, in turn, is expected to propel public debt from 76.6 percent of GDP last year to 85 percent this year, the highest level in two decades and the fourth-highest level of any euro-zone member state.
Meanwhile, the “investment” spending, much of it earmarked for grandiose new projects such as hydroelectric dams, highways and a high-speed rail link between Lisbon and Madrid, while helping lay the foundations for future growth, has failed to save jobs in the near term. Unemployment has continued to tick upward and now stands at just under 10 percent, the highest level in 20 years, but still half that of Spain.
As a result, in the wake of the international jitters that kicked off over Greece’s debt crisis, investors, credit rating agencies and international institutions turned their sights on Portugal.
The day after Sócrates presented his 2010 budget on January 26, the extra yield investors demand to hold Portuguese debt rather than German bunds jumped to 105 basis points from 93 basis points the previous day – triple the differential of two years ago.
A “slow death”?
Days earlier, ratings agency Moody’s had warned that the Portuguese economy faces a “high risk” of suffering a “slow death,” predicting that investors’ demands for higher yields to hold Portuguese debt will sap more government spending and result in a vicious downward spiral. The International Monetary Fund, meanwhile, released a report predicting that the Portuguese economy will grow by 0.4 percent this year, undermining Sócrates’ forecast of 0.7 percent growth on which he based his 2009 budget.
The divergence in predictions, combined with a less radical cost-cutting approach than in countries such as Greece, goes someway to explain the pummelling Portugal has taken on international markets.
“Given recent developments elsewhere, especially in Greece, I think probably the measures in the 2010 budget will not be enough to calm down fears. However, the Stability and Growth Program that’s going to be published soon will probably contain a reinforcement of restrictive measures… But it will be harsh to calm down markets without very demanding policy in terms of expenditure,” Paula Carvalho, an economist at Banco BPI, told Qorreo.
In addition, as the IMF noted, Portugal’s economy is closely tied to that of Spain, and until its larger Iberian neighbour starts growing again, Portugal will also struggle.
Carvalho argues, however, that the links are not as strong as they once were, thanks to Portugal’s efforts to diversify its economy and trading partners in recent years.
“There are recent structural trends occurring that suggest Portugal will manage to take off from the Spanish path: diversification of exports in terms of markets as well as products sold. These developments are naturally slow but they will pay in the long term and should help the country to follow a path unpegged from the Spanish economy,” she explains.
Fate has also dealt the country a bad hand recently, with reconstruction in Madeira following storms earlier this month that claimed the lives of 41 people expected to cost €1 billion and take 10 years.
On top of those short- and long-term issues, there are mounting concerns about Portugal’s political stability.
Sócrates, who won re-election in September last year, has lost the Socialist majority in parliament that empowered him to embark on major reforms during his first term. The Socialists’ traditional leftist allies are recalcitrant about austerity measures, forcing Sócrates to negotiate with the centre-right Social Democrats led by Manuela Ferreira Leite. The difficulties of getting the budget approved and growing public dismay have led more than one Portuguese newspaper to suggest new elections may be on the cards.
Sócrates, however, appears confident that he can pull through. Older, greyer and wiser than when he first won office in 2005, he has dealt with deficits, debts and uppity political allies before. This time it will be far harder, but not impossible.
“We did it in the past — we will do it again,” Finance Minister Fernando Teixeira dos Santos recently told The New York Times in an interview. “We are the same guys. We are committed to doing it.”
If they do, Portugal’s long-suffering citizens can only hope it’s for the last time.
Menos desempleo en Portugal que en España