Can Portugal and its economy escape a similar fate to Greece?

This week has opened with another burst of optimism about a deal over extra bailout funds for Greece with the German Dax equity index rising by more than 2%. Although there is apparently a problem created by the fact that Greece has sent the wrong documents to the Eurogroup members. Also whilst it is early in the day the European Central Bank has already raised the amount of Emergency Liquidity Assistance for the Greek banking sector after reports that there were pre-orders for a billion Euros of withdrawals. So the issues highlighted by my post of Friday are clearly ongoing. However today I wish to look west to a country which must be wondering if it is next on the list which is Portugal. In a situation often described in North/South terms Portugal is definitely the West to Greece’s East but many of the same economic problems can be seen there.

Economic Growth

Portugal has had its problems too in this area but the pattern is different. Greece boomed into a bust albeit that we now doubt some of the recorded boom. However Portugal had struggled to sustain much economic growth even before the credit crunch hit it. From the 4th quarter of 2002 it saw a year of annual economic growth declines as the implications of 9/11 hit and ironically only showed some real flickers of recovery just as the credit crunch was arriving. Next saw perhaps not the nuclear winter which hit Greece but a long drawn out contraction starting in the last quarter of 2008. Again there was a flicker of recovery in 2010 before another period of decline. In spite of the recent recovery phase the Gross Domestic Product level of the beginning of this year was of the levels seen in 2003.

Thus we have had more than a lost decade in Portugal over a period where people were expecting growth not contraction. More and more may look back to the period before Euro entry when Portugal performed better peaking at an annual growth rate of 5% in the spring of 1998.


A consequence of the economic malaise seen in Portugal has been an elevated rate of unemployment.

The provisional unemployment rate estimate for April 2015 was 13.0%, down 0.2 percentage points from the definitive estimate for March 2015.

This is a solid improvement on a year ago when the unemployment rate was 14.6% but even so it leaves Portugal with an ongoing problem.  Back in the pre credit crunch times unemployment was heading towards 7% or to put it into round numbers there are approximately an extra quarter of a million unemployed in Portugal now.

A corollary of this has been to disproportionately affect the young as the youth unemployment rate is still 31.2%. There have been better times to be young in Portugal.

Debt Troubles

One of the reasons that a national debt to GDP ratio of 120% was used as a benchmark in the Greek crisis was to avoid embarrassing Portugal and indeed Italy. Both countries were below that number back in 2010 so the Eurocrats thought it safe to use it and ignored the fact that its actual significance was what exactly? As it turned out even picking an apparently safe benchmark soon went wrong as economic growth failed and turned downwards whilst Portugal found itself having to support its banks.

Accordingly a national debt to GDP ration which had been in the 70%s surged to 125.8% in 2012 and at the end of 2014 was 130.2% according to the Bank of Portugal. Also Portugal has continued to run a fiscal deficit on a substantial scale and frankly the 4.8% of GDP in 2013 did not shrink much as it was 4.5% in 2014. So one more time we find ourselves considering what austerity actually means as these are quite substantial deficits especially if we consider that Portugal has been in a program to reduce them since they rose above the Euro area limit of 3% of GDP per annum. So whilst we have austerity in terms of an effort to reduce the size of the annual deficit it is rarely pointed out that Portugal has also seen quite a fiscal stimulus if you look at the ongoing deficit numbers and the increase in the national debt.

Another way of putting it is that Portugal is running fiscal deficits on a similar scale to the UK. However its national debt is around as half as big again in relative terms and in some ways more worrying it now has a track record of struggling to grow the size of its economy.

Should there be a Greek departure from the Euro or Grexit then the total exposure of Portugal as a state is 4.3 billion Euros which of course it is in no state to pay.  This is because it was responsible for its share of lending to Greece by the Euro area until it called for a bailout itself. One bonus of the situation has been that the interest-rates charged on the bailout cash have been successively reduced in line with what has happened regarding Greece. Thus there is a capital problem but the cost of servicing the debt is relatively low.

UK Involvement

Portugal is the UK’s or perhaps one should say England and Wales’s oldest ally (it predates the 1707 union with Scotland)  so on that basis maybe it is not a surprise that we got involved in its bailout. More awkward of course is the way that the UK was in effect bailing out a Euro area which in overall terms was more than capable of doing so itself.

Portugal borrowed some 24.3 billion Euros out of the 26 billion available to it from the EFSM (European Financial Stability Mechanism) which the UK backs as part of its involvement in the European Union. This happened one night as the UK was switching from one government to another (both seem to blame the other) and was distracted by coalition negotiations and has rarely got much publicity. The EFSM did get some exposure I understand in the Daily Telegraph over the weekend as a risk to the UK over Greece but of course the sums are limited by the fact that of this fund much of its capacity has been used in Portugal and also Ireland.


This is an ongoing problem for Portugal as last weeks numbers from Portugal Statistics demonstrated.

the resident population in Portugal by 31st December 2014 is estimated at 10,374,822 inhabitants; demographic balance for 2014 is characterized by a decrease of -52,479 inhabitants, as a result of both a negative natural balance (-22,423) and a negative net migration (-30,056).

Also the structure of the population has worsened in age terms. I am reminded of this from last summer from Portugal News.

According to the Portuguese statistics agency, the number of 15 to 29-year-olds dropped in all but six of the country’s 308 municipalities between 2001 and 2011.
The office revealed that the number of young people in Portugal shrank by 21.4 percent during this period, despite the fact that the total population actually grew by about two percent during the first decade of this millennium.

In more recent times one would expect emigration from Portugal’s young to have only increased and especially from the “brightest and best”. Perhaps there should be estimates made of exactly how many are in Little Portugal not so far from me in Stockwell.


So far Portugal has been a model student in the Euro area detention class. It has pretty much done what has been asked of it and has raised few if any quibbles. Sadly the same economic policy which wrecked havoc in Greece sees Portugal also suffering economically. Frankly it cannot sustain an exchange-rate that is the same as Germany’s and its whole Euro area experience tells us that. Indeed Prime Minister Coelho has made himself something of a hostage to fortune.

“should something serious happen to Greece, Portugal will not be the next to fall”

Accordingly the chances of the Portuguese establishment singing along with the rock group Queen are as low as anywhere.

I want to break free
I want to break free
I want to break free from your lies
You’re so self satisfied I don’t need you
I’ve got to break free
God knows, God knows I want to break free.

Perhaps the Portuguese people will make the decision for them but for now there is a tightening of the noose on Portugal as it has seen its bond yields head higher to around 3% at the ten-year maturity. But underlying all this is the simple fact that economic life has been a struggle as issues like generalised corruption continue. The establishment seem to do very well but the people do not and here comes the irony which is that the Portuguese hoped that Europe would rescue them from their establishment. Instead they found themselves in an even worse mess. In this sense they find themselves in the same situation as Greece.

Portugal needs a change of the order of a quantum leap.


Day after day goes by with promises of a solution which means that Rosie Gaines must now be right surely?

Let’s get close closer than close
closer than you could ever imagine us
Let’s get close closer than close

Let’s get close closer than close
closer than you could ever imagine us
Let’s get close closer than close
closer than you could ever imagine us



11 thoughts on “Can Portugal and its economy escape a similar fate to Greece?

  1. Hello Shaun,

    Just goes to show that if you want a Euro currency you should have full fiscal and legal union as well or you just run into trouble

    One of the reason I’m against the concept . as the Irish man said on directions ” well I wouldnt be starting from here , you see ”

    Roll on the LMU 🙂


    PS: I still think they muddle through until the IMF is out of the picture then give a full “refund” to Greece

    How else could you keep the Euro alive ?

    • Just goes to show that if you want a Euro currency you should have full fiscal and legal union as well or you just run into trouble

      You would think that someone might have pointed this out before all this trouble. What’s that you say … some people did??

      Oh bugger it … which way is Cork then?

        • Hi Jim M

          Thanks for the reminder of Wynne Godley who popped up in various ways in analysing the UK economy too. I had the impression back in the day that he was something of a “young turk” but was obviously mistaken.

          In terms of Europe they were unlikely to be listening much to British voices as we had just been ejected from the ERM! Also a lesson for Greece might well be that no-one came to our aid……

          In case you have not seen it here is something to cheer West Ham fans up which is an estimate of how good a deal you are getting with the Olympics stadium.

          Not quite so good for the UK taxpayer nor for athletics fans like me if you look at what is happening to the Crystal Palace stadium. Sadly as you look into that you see the name of Sebastian Coe and end up wondering what he meant by Olympics Legacy.

  2. Herbert Stein told us what will happen when something isn’t sustainable! With no exchange rates to iron out the competitiveness of all Euro countries against the German cost / productivity standard and after Germany’s disastrous currency union between the western and eastern sides of the country where the exchange rate was set at the wrong rate, so the Germans are not prepared to make transfers to the weaker / poorer Euro countries, the Euro is doomed.

    It is not sustainable for Germany to keep running surpluses at the expense of other countries, much of which is through them cheating on Euro wide agreements on wage inflation and inflation targets.

    The Euro may stagger on maybe for another 20-50 years, where it is big ego political project, as the whole Euro region becomes more and more impoverished with trade steadily declining as a percentage of world trade. The young will move to jobs, better pay and prospects in more dynamic economies, so their already troublesome demographics will continue to fall off a cliff.

    Like countries that stayed in the Gold Standard long after it’s sell by date, so those that stay in the Euro the longest (including Germany) will see the steady erosion of the global percentage of world trade and the GDP / PPP will fall for everybody. Not an inviting or pleasant prospect, but we can see from the 80% of Greek people that support their continued membership of the Euro, such is the persuasive nature of EU propaganda, that if they were Lemmings, 80% would be voting for compulsory EU cliff diving contests!

    Whereas a child today might come home from a history lesson and ask his parents: “What was the LMU?, to be met by a shrug of the shoulders, thus in a few more generations, a child may well be asking: “What was a Euro? to met by a similar unknowing shrug, where the Euro has been consigned to where it belongs, in the dustbin of history!

    • Hi Rods

      I think that you point is backed up by the European Central Bank website.

      “Lithuania joined the euro area on 1 January 2015. On that day the euro replaced the litas at the fixed exchange rate of €1= LTL 3.45280. The irrevocably fixed exchange rate is €1= LTL 3.45280.”

      Irrevocable! Do you see that at the Bank of England about £’s or at the Federal Reserve about $’s?

      They do not lack hot air however…

  3. Hi Shaun, nothing to say about Portugal I’m afraid but feel that Portugal’s rising 10 year yield is indicative of the general trend that has been playing out in recent weeks whilst equities have (volatilely) traded sideways – this may be the beginnings of “normalisation” by the markets despite the CB’s best efforts at procrastination.

    • and I mistakenly hit the “post” key before I could say – “just to echo Rods 2 reference to Herbert Stein

    • Hi Noo2

      It could well be and in this instance is happening with the ECB trying for exactly the reverse with its QE program.It has bought 3.3 billion Euros of Portuguese bonds as of the end of last week. Rather oddly it has not front-loaded its purchases as it hinted it would.

      Unlike Greece the bond yield explicitly matters to Portugal as it does issue bonds these days so I would imagine pressure is being applied on the ECB.

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