Portuguese Debt

Written by Elie Fuhrman
Edited by Daniel Kilkelly

Not once in the past 17 years has Portugal had a positive trade balance. Unemployment has been high since 2003. Portugal’s growth has been in a landslide for the past 20 years. To exasperate this problem, the Portuguese government debt has doubled over the past 10 years to 75% of GDP. In short, the Portuguese are headed towards more austere times, as the current trend of debt financing to prop up the economy is untenable. Portugal’s economy was not mature enough to join the European Union, and as a result Portugal will suffer and/or the Euro will collapse.

Portugal’s unemployment is at a record high rate. Currently the unemployment level is at 11.2%. For an economy to show growth, this level must decrease. The current trend of unemployment has only increased for the past 10 years. One of the underlying reasons for this, is that those who could emigrate from Portugal since Portugal’s entrance into the European Union, did so. To further worsen the economic situation of Portugal, the educated people were the citizens who left. Furthermore, since joining the European Union, wages of workers had to increase to the minimum wage of the European Union. As a result, firms exported labor jobs from Portugal to East Asia to lower costs. Had Portugal not joined the European Union, they could have incentivized immigration and furthermore pursued an individualized monetary policy. This would have been beneficial as Portugal would have had some exchange rate flexibility that would have helped increase exports and lower unemployment.

Another component of Portugal’s failing economy is its downward trend in GDP growth. Without GDP growth, Portugal is falling behind the rest of Europe. If this trend was positive, then when austerity measures occurred there would potentially be stagnation in positive GDP growth. However with a negative slope in GDP growth, with the implementation of austerity measures, projected growth would be a menial 1.2% this year, and totally stagnant next year, or 0% growth.1 This means that Portugal has lost its competitive edge against other countries. To a citizen of Portugal this should be worrisome as commodity prices are rising faster than GDP growth. Hence, Portugal is also going to have to combat inflation during these times while being innovative and paying down debt.

An additional complexity to Portugal’s ailing economy is the negative trade imbalance that the country has had for the past 17 years. A negative trade imbalance is not sustainable if a country is running a gigantic deficit at the same time. Trade imbalances are very normal under the assumptions of a zero sum game; someone must win for the other to lose. For a country that is going to have to pay off huge amounts of debt it is extremely beneficial to have a positive trade imbalance. This is something that Portugal does not have. A country cannot pay back creditors if it does not have a positive income. For the past 12 years, the Portuguese have been running a huge government deficit. Under Keynesian policy, the government should stimulate the economy. However, this is no longer possible, as the government under EU laws cannot sustain a larger deficit. The government has been trying to support the economy, and this has had very little effect; there is still high unemployment, low GDP growth, and an even larger debt load.

What really put the last nail in Portugal’s metaphorical coffin was their bank’s lending practices over the past 15 years. The banks currently have a capital to asset ratio of 6%, and their liquid reserves to bank assets are 0.11%. The banks are insolvent! The crisis in Portugal is multifaceted. There is the sovereign debt crisis, a bond crisis, insolvent banks, and currently no acting prime minster or finance minister. For a bailout to occur, someone has to accept it. Once someone is found to accept the bailout, it’s estimated to cost ~70-80 billion Euros, this equates to 47% of GDP. 42 Billion Euros will go to cover sovereign debt payments, 36.8 billion Euros for bank bond redemptions, and 10.5 billion Euros to recapitalize the banks.2 This is a bailout that will have to be repaid by Portuguese citizens, which only drags out the fundamental problem. The unsustainable debt level is only going to increase, and it will have to get paid back eventually.

Apparently, however, 10-yr bond holders are indicating that they do not support the current bailout conditions. In the past year interest rates have skyrocketed up to 7.79% which is a move of 340 basis points. This is a vote of no confidence for the Euro. Warren Buffet made a statement on March 24th to the extent that it is not unfeasible that the Euro will collapse.2

With no leadership in Portugal, the situation is all the more dire since the bailout will fail. The IMF and the Eurozone have already failed in Ireland and Greece. Ireland and Greece are currently suffering through very similar situations; austerity measures, budget cuts, high debt, and high unemployment. It would be expected that austerity measures and an influx of monies would begin to show an iota of economic recovery. To the dismay of the EU, the bailout is not producing economic results or confidence. Interest rates on 10-yr Greek and Irish bonds have increased since their bailouts and currently stand at 12.58% and 10.12% respectively.

The Portuguese cannot accept this bailout, it will not improve their economy and only further indebt them. Furthermore, the wealthier EU countries cannot keep throwing money at every country that should not have joined the Euro. Fundamentally there are not enough resources to bailout every country. The only long term solution is the breakup of the Euro. Wealthy Euro zone countries should cut their losses; Germany should not be held responsible for other countries poor fiscal management for the past 15 years. Throwing money at the problem is not a solution. The only long term solution is debt default or a breakup of the euro.


 **Due to technical difficulties we recently had to switch domains and transfer all of our website content.  Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.

 Lewis, Jeffrey, Bernd Radowitz, and Jonathan House. “Portugal Says Austerity Will Slow 2011 GDP Growth – WSJ.com.” Business News & Financial News – The Wall Street Journal – Wsj.com. 16 Oct. 2010. Web. 29 Mar. 2011. .

“Portugal Bailout Could Cost $99 to $114B – Agustino Fontevecchia – Moral Hazard – Forbes.” Forbes. 24 Mar. 2011. Web. 28 Mar. 2011.

El-Erian, Mohamed A. “Portugal’s Government Collapse Complicates Europe’s Problems | Newsmaker | Analysis & Opinion | Reuters.com.” Analysis & Opinion | Reuters. 24 Mar. 2011. Web. 28 Mar. 2011. .

Govan, Fiona. “Portugal Facing £61 Billion Bail-out as Government Loses Confidence Vote.” Telegraph.co.uk – Telegraph Online, Daily Telegraph and Sunday Telegraph – Telegraph. Web. 28 Mar. 2011. .

TradingEconomics.com – Free Indicators for 231 Countries. Web. 28 Mar. 2011. .

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