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.

Comment

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……