Portugal’s fate was sealed long ago, well before Jose Socrates’s resignation as prime minister on March 23.
Although the government managed to get away a series of bond auctions at the beginning of the year, it was at penal rates. Yesterday’s auction, in which Portugal raised €1 billion and was forced to pay a yield of 5.9% for one-year bills and 5.11% for six-month money, proved the final straw.
Portugal will now follow the path trodden by Ireland and Greece in seeking rescue loans from the EU and IMF, with analysts reckoning it will need about €80 billion. Whether or not the bailout will do Portugal any lasting good is a moot point. What the country needs, like Ireland and Greece, is a restructuring of its debts to make them sustainable. Portugal’s problem is one of solvency not liquidity.
While Portugal will be associated with the eurozone crisis for years to come, the single currency has magnified the country’s travails rather than be a cause of them. Beset by deep problems within its public finances, Portugal’s economy is moribund, stymied by an interfering government and an entrenched oligarchy of rich families that dominate the biggest companies.
It has consistently lagged behind its European rivals. The Czech Republic, Greece, Malta and Slovenia all overtook Portugal by GDP per capita in the first half of the last decade. In 2006, at the height of the global boom, Portugal was the worst performing economy in Europe; its GDP grew a paltry 1.6%.
The new government’s biggest priority will be making the economy competitive once the nuts and bolts of the rescue package are finalized. How it does so is not clear. Like Ireland and Greece, Portugal needs to address the conundrum of cutting its fiscal deficit, currently 7.3% of GDP, without depressing an already shrinking economy. There is no simple way out. Unfortunately, and unlike its two biggest former colonies Brazil and Angola, Portugal is not blessed with natural resources that it can export at high prices to get it out of its trough.
Instead, Portugal must tackle its over-regulated labour market and encourage greater private sector investment. One of the consequences of Portugal’s withdrawal from the capital markets is that its regulated assets, such as utility EDP and power grid operator REN – both attractive to investors recently – will also find access to finance cut.
The new government, which will be installed after June’s elections, must view the crisis as a chance to rejig its economy. Otherwise Portugal faces the prospect of losing all sense of direction.