Portugal faces it debt demons at exactly the wrong time

Much is happening in Portugal at the moment as we note that the socialist parties used their parliamentary majority to over throw the government of Passos Coelho on Tuesday. As I pointed out on October 30th this was always likely in spite of the way that the hashtag PortugalCoup had become so prevalent. Of course we do not know what happens next as we await to see how the Portuguese President will respond. One thing that it seems likely to change is the way that Portugal has until now accepted Euro area austerity lock stock and two smoking barrels. Also we will see how the Euro area responds to such a challenge as we wonder if the Portuguese will get the opportunity to vote again. Rather amusingly @Weayl has suggested they may learn something about tactics and strategy from Star Trek.

The Portuguese economy

Unfortunately nobody has managed to described Portugal’s economic malaise with the panache that “girlfriend in a coma” by Bill Emmott did for Italy. Both share the problem of a lack of economic growth and as I shall discuss later this leads straight to a debt problem. I put it thus on October 30th.

let me open with the central issue which is that for some time now the Portuguese economy has struggled to sustain economic growth. Even in the better years it has managed GDP (Gross Domestic Product) growth of only 1% per annum.

Not much is it? The meant that even before what we now consider to be the era of the Euro crisis Portugal was in relative decline as the Economist pointed out in 2007.

Look at any table of European economic data and Portugal stands out.GDP growth last year, at 1.3%, was the lowest not just in the European Union but in all of Europe…….Portuguese GDP per head has fallen from just over 80% of the EU 25 average in 1999 to just over 70% last year.

It sends a chill down my spine to recall that the Euro area “solution” was austerity something with which we are now all too familiar with especially when it comes to the consequences.

Today’s data

It is quite clear from today’s update from Portugal Statistics what has revived thoughts about the themes above.

Comparing with the second quarter, GDP registered a null change rate in real terms in the third quarter (0.5% in the second quarter). The contribution of domestic demand was negative, mainly due to the reduction of Investment, while net external demand contributed positively, with Imports of Goods and Services decreasing more intensely than Exports of Goods and Services.

They cannot quite bring themselves to type 0% can they? And you have to look a little way down the report for this so for balance let me show the top bit.

The Portuguese Gross Domestic Product (GDP) increased by 1.4% in volume in the third quarter 2015, compared with the same period of 2014 (1.6% in the second quarter 2015).

Even put this way there is a slowing and if you are familiar with the economic history of Portugal you are bound to be wondering along the lines of the famous line from Muhammed Ali to George Foreman in the Rumble in the Jungle.

Is that all you have got George?

If so what was the pain of austerity for?

Breaking it down

We do not get the detail we would like but this even bare statement below has several worries in it.

The contribution of domestic demand was negative, mainly due to the reduction of Investment.

Falling domestic demand reminds us of the austerity era and falling investment speaks for itself. I pointed out on the 30th of October that Portugal had improved its trade performance but even this may well have been more of a poisoned chalice this time around.

net external demand contributed positively, with Imports of Goods and Services decreasing more intensely than Exports of Goods and Services.

This is a “bad” trade performance and not the use of the word employed by Michael Jackson as we see falling imports backing up the fall in domestic demand. We only have one quarter’s evidence but this again is a reminder of one of the problems of the austerity era experience.

i regularly point out that due to their inaccuracy we should not put too much emphasis on minor GDP growth changes. But it is hard not to be troubled by a sequence which has gone 0.4%,0.5%,0.5% and now 0%. We go from hopes of the “escape velocity” of Mark Carney to pondering the power of gravity. Or as Lumidee put it.

Uh oh, uh oh, uh oh, uh oh.

Some Perspective

If there was a year in the credit crunch era which should be good this is it. As I only discussed yesterday commodity prices have fallen which should be a net benefit for Portugal and its economy. Indeed it should be benefiting the very domestic demand which has just fallen! After all that is what we have observed in the UK,Spain and Ireland in 2015 and to bring it up to date both France and Germany have declared this morning.

Also there is the European Central Bank which if the speech from Mario Draghi yesterday is any guide seems determined to press the monetary expansion pedal even closer to the metal. Actually maybe even through its lower bound. The recent Open Mouth Operations have pushed the Euro into the 1.07s versus the US Dollar and the trade weighted index to 91. We only have to wait until the beginning of December for the promised further action.

What about the debt?

Ordinarily this focuses on the problems that Portugal has with its national debt but let us widen out the discussion. Bridging Europe has looked at total debt and come to this conclusion.

Portugal has the highest public and private debt, counting for 530.5% of GDP, far beyond the other three crisis-affected member-states – Greece, Spain, and Italy.

So we see a private-sector debt to GDP  ratio of pretty much 400% and it is the corporate sector leading the way.

This year, corporate debt is expected to reach 240.1% of GDP.

If it keeps borrowing and the economy of Portugal does not grow what could go wrong?

Oh and household debt is high too but it does not quite reach the peak in Spain.


I like Portugal very much so I review that state of play with sadness and regret. The essential problem is its inability to grow which has persisted for quite some time now. Hopefully it has shifted its ability to trade in a favourable direction but if domestic demand remains troubled that will take a very long time to change things. Meanwhile the debt burden will grow and grow and look ever more unbalanced. The risk of a Black Swan event grows.

For the moment the ECB is dealing with the interest-rate cost of this and in fact may soon help even more. In spite of the current political uncertainty the ten-year yield is only 2.82%. This is basically because the ECB is munching its way through Portugal’s government bonds “like a powered up Pac Man” as the Kaiser Chiefs put it. If Mario Draghi’s hints are true then the ECB may also start buying more of the corporate debt too which will be more welcome in Lisbon than anywhere else.

But speaking of Black Swans one may pop up later on if the DBRS ratings agency should downgrade Portugal. At that point Portugal is in danger of not qualifying for ECB Quantitative Easing anymore. So in true Eurovision style the DBRS switchboard will no doubt already have had the opportunity to hear this.

Hello Mario Draghi speaking……


21 thoughts on “Portugal faces it debt demons at exactly the wrong time

  1. Shaun, it is a shame Portugal is in this position, but I cannot see any end to their problem, without substantial further economic and political integration with the rest of the Euro zone. This goes for Greece, Spain and Italy as well. Their major structural problems cannot be resolved with tinkering at the edges with austerity, debt restructuring and QE. The time is fast approaching when the Euro zone will have no option but to each surrender their sovereignty, politically and economically.
    Do we want to be part of that?

  2. I am sure that the Portuguese, Greeks, Spanish and many others will be fuming at Mario Draghis recent comments that British negotiations must not threaten the ‘extraordinary achievements’ of the Euro! He also re-iterated the claim that the EU has only one currency and that is the Euro. In other words if you don’t have the Euro then you are an EU second class citizen – unless they need a cash injection that is! Then pounds will do thanks.

    • Hi Pavlaki

      Well we can at least agree that the Euro experience has been “extraordinary” although with rather a different nuance on the word! As you say they do seem rather keen on UK Pound’s via our net contribution to the EU Budget and also our current account deficit.

      We have also been doing our bit in helping the Euro depreciate as we have moved from 0.88 putting it their way in the spring of 2013 to 0.707 now. This means we have reversed nearly all of the 2007/08 sterling depreciation.

      Meanwhile noting other news let me add this today #ViveLaFrance

  3. Well it does seem that Mario is well into the United States of Europe camp , well actually the Franko-German Empire one

    Alias poor Portugal , I knew you well………

    What we’re saying is that the poor country is actually bust like our Banks, and only kept on life support by the ECB

    Well as lender of last resort so it should

    Does make you wonder what the fuss is about regards Greece ……

    And if we factor in all the PIIGS can the ECB print enough to cope ?

    What does Germany do ? And also then the cost of a million refugees as well? Can they afford it ?

    I’d like to stay out of this Euro mess but even Camel son’s is bonkers on joining – hehe

    We shall see

    have a nice weekend break Shaun , pull up a chair and buy more popcorn !


    • Hi Forbin

      The Franco-German empire as you put it is one which the Italian establishment will like. For example part of Mario’s interview to Il Ore last weekend was around some short-dated Italian bond yields being negative. Why? Well Mario is buying them! As of the end of October some 61.3 billion Euros worth have been purchased. Whilst this oils the wheels of the Italian government and masks the problems that Italy has with solvency the ordinary Italian faces an economy with many of the problems I have discussed in the article on Portugal.

      Meanwhile not such a shabby week for you on the corn futures front as they have dipped a bit.

  4. I just find this so tragic. It seems like an age ago when all these countries were invited to join one of the world’s major currencies.
    If I remember correctly, the idea was that these economies:
    1. Had converged sufficiently (inflation, unemployment etc) to coexist in a single currency together;
    2. Would be boosted by being a member of the Euro.
    Whatever the politics, it almost seems incredible now that anyone could have believed this nonsense. To be honest, it now looks as though “convergence” was more like two shooting stars crossing trajectories.
    What has become clear, however, is that these arguments seemed innocuous and intangible at the time, but have turned into extraordinarily damaging and harmful for real people. For example, is it conceivable that Greece or Portugal could have got into such debt or had such horribly high unemployment had it stayed out of the Euro?
    And yet, based on this very transient “convergence”, these countries seem locked in for ever. How could European politicians have got it so wrong?

    • James

      for some of us we saw the writing on the subway walls long ago

      The EU as it is now , is a political contruct to make at any cost , a United States of Europe instigated by the Frank-German alliance ( which is why I term it the Frank-German Empire )

      It seemed to me to be a jsck booted attempt and with polls like the Irish and now Portugues one , its seems the kid gloves are coming off.

      It is not about the individual states freedom for they will and have none . its about subjigation of the nations states to a vast EU burocracy – you cannot leave – It is a monkey trap to all smaller nations to join .

      Now you know that its not about economics and all politics

      Theres nothing you can do – you will vote until you say YES!

      have some popcorn and a seat on the sofa – its going to be quite the ride !


      • I have always been against the project, as I believe that any system where you cannot chuck out the leadership (from Stalin to FIFA/IAAF), you will end up with a dictatorship, however benign.
        I was just struck by recollecting the staggeringly naïve way in which convergence was sold as a way to ensure heaven on earth, when in fact it was illusory at best (look how Greece “achieved” convergence and Italy never quite made the debt ceiling (remember 60% of GDP?).
        How could anyone have fallen for it?

      • A strong case can be made that the EU is an American construct, pushed through and designed by the States for American economic reasons. The lack of any real EU independence in the wake of the crash (same “solutions”, same philosophy) is a fairly clear indication that the two “zones” are really regions of the same zone.

    • Yes, it is conceivable that Greece & Portugal could have horribly high unemployment. Never under-estimate politicians ability to mess up. The debt is less so, because the banksters are betting on the ECB to bailout endebted eurozone members. Who would buy Drachma denominated debt ?

      It is curious to note that the German constitutional court has precedence over Brussels diktats, where most EU nations must bow to Brussels. The whole of the EC & EU treaties are badly setup and inconsistent. Even the much vaunted single market is a myth that cannot stand up to serious scrutiny. This week’s examples are winter tyre prices and bank account costs – a German pays 50 euro less for the same set of tyres as me and gets free banking. Economic discrimination based on country of residence destroys the myth of a single market.

      • “Who would buy Drachma denominated debt ?”

        You recognise that, without the €, Greece could never have got in such a mess?

        A M(H)oney Trap?

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