Next up, Portugal
Although its story might be overshadowed by events in the Middle East, Portugal is a small country with a big crisis. Indeed, the major risk facing any small country in today’s global economy is getting caught in the throes of a larger crisis, and finding itself at the mercy of the big players: major economies, international organizations, investment banks, and hedge funds.
Since the crisis of 2008, Iceland, Ireland, and Greece have all been pushed into tough austerity programs by forces largely beyond their control. While Greece and Ireland had the support of the European Union Iceland’s brutal crash underscored the danger of being a small economy going solo in a fast-moving financial avalanche. Even with European membership, both Greece and Ireland face an uncertain future, with considerable questions over the sustainability of their debt burdens. The fear now is that Portugal is heading down the same road of imposed austerity, government instability, and violent domestic protest.
Portugal’s crisis had a long fuse. Although concerns over this country of 10.5 million people emerged in 2010 when Greece and Ireland fell out of favor with international investors, the Socrates government managed to implement a tough austerity program. Moreover, its debt to GDP and public sector to GDP levels were not in the same troubled neighborhoods as Greece and Ireland. As Capital Economics noted: “At 7% of GDP in 2007, Portugal’s budget deficit was the smallest among the periphery – excepting Italy. Gross government debt, at around 80% of GDP also compares favorably to the Greek and Italian equivalents of about 120% and 140% respectively.” Although hurting, Portuguese banks were not in the same danger zone as those of Ireland.
Despite this, Portugal came under increasing pressure from international markets. The Iberian country’s challenge—as with many European countries—was slow growth, compounded by a major international financial storm that cast doubt on the ability of Portugal to find easy access to the market. After facing the issues of a rising debt burden, deeper analysis revealed that Portugal’s long-term economic reforms had not resulted in a highly productive economy. Investors, already worried about the so-called “PIIGS” economics of Southern Europe, focused on Portugal as the next country primed for crisis.
By early 2011, Portugal found itself between a rock of nervous investors and a hard place of implementing a convincing austerity program. Like Greece, Portugal is also confronting questions about the reliability of its book-keeping. The government’s projected deficit of 7.3% for 2010 totaled 8.6% instead.
For their financial sins, Greece and Portugal have been punished by both ratings agencies and international markets. Yields for Greek 10-year bonds have more than doubled to 12.85% in the last twelve months. Meanwhile, Greece has been downgraded repeatedly by ratings agencies, most recently being dropped to BB- —deep into “junk” territory—by Standard and Poor’s. Portugal has seen yields for its 10-year bonds rise from 4.21% in March 2010 to 7.9% in March 2011. Portugal’s debt rating has also been hit hard, being downgraded by S&P to BBB- —the last stop in “investment grade”—with a negative outlook.
The next test for Portugal is covering an April redemption of €4.5 billion. While expectations are that the Lisbon government has a plan in place for this, June’s €4.9 billion redemption may be more challenging.
Portugal, Italy, Ireland, Greece, and Spain
When compounded with the political instability from the fall of the Socrates government and upcoming elections, June looms as the next key date in the European sovereign debt crisis.
Portugal’s future is going to be determined in the short-term by its ability to find enough liquidity to repay a national debt bill of €9 billion in April and June. It only has €4 billion in foreign exchange reserves. At the same time, Lisbon must work to implement the reforms necessary to restructure the economy to generate productivity and win market confidence.
The sad truth is that Portugal’s debt has mortgaged its future to foreign bondholders, including other European governments that are contributing to the European Financial Stability Facility (EFSF) and its successor, the European Stability Mechanism (ESM). Although Portugal benefits from being in the EU, its voice within that organization is one of many. Portugal’s economic crisis diminishes its bargaining position and leaves it a small country increasingly at the mercy of larger countries. Leading large countries like Germany and France want to develop a more economically viable union, even at the cost of small country pain.
Expensive bailouts have already been paid out to Irish banks and the Greek government in an effort to avert collapse in those two countries. €100 billion has been used to prop up troubled Irish banks (with more potentially on the way). The move remains controversial since no one is sure when or if they will be able to repay their debts. €440 billion in bailout funds has also been made available by the EU to buy bonds directly from distressed governments. With more than half a trillion euros in play, EU central bankers and political leaders are doing their best to head of financial catastrophe, but the vulnerabilities within the system remain.
Small countries are now confronting the reality that they have little room to run up large debts because they have fewer resources to draw upon when liquidity evaporates. Markets continue to punish them with higher borrowing costs and ratings downgrades. Austerity imposed by the big boys is not sitting well, but may be the only way to avoid defaults. While small European countries are learning the painful lesson that membership comes with a price, the big countries are also learning that the problems of small countries can quickly become big problems for everyone.
PhD, Oxford University
*Ο Andrew Novo είναι συγγραφέας (μαζί με τον Scott MacDonald) του βιβλίου “When Small Countries Crash” που εκδόθηκε το 2011 από τον εκδοτικό οίκο Transaction. Έγραψε το πιο πάνω blog για τη StockWatch. Το blog γράφτηκε πριν το χθεσινό αίτημα της Πορτογαλίας για χρηματοοικονομική στήριξη από την ΕΕ.