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Portugal sets the example for austerity

As European heads of state locked themselves into a programme of fiscal austerity at last night’s summit in Brussels, they spared just a few token commendations to those countries already bearing the brunt of brutal adjustment and those now surrendering to it. 

“We welcome the measures taken by Italy; we also welcome the commitment of the new Greek government, and of the parties supporting it, to fully implement its programme, as well as the significant progress achieved by Ireland and Portugal in implementing their programmes.”

At the start of the week, anyone attending London’s Chatham House would have heard Portuguese finance minister Vitor Gaspar acting as cheer leader in chief for austerity as the necessary response to structural weaknesses and macroeconomic imbalances accumulated over ten years in southern Europe as households, companies and governments borrowed heavily to compensate for weak growth.

Gaspar has a tough message for those advocating a Keynesian response to the looming recession in Europe.

“The previous Portuguese government interpreted the 2008-09 crisis as temporary, [one] that should be met with a budgetary policy stabilization response. Therefore in 2009 the country engaged in a sharply expansionary budgetary policy. The initial presentation of the 2009 budget by the government foresaw a budget deficit of 2.2 percent of GDP and the outturn was a deficit above 10 percent of GDP. This was to a very large extent a deliberate budgetary expansion, which did deliver the expected and desired Keynesian result in the sense that Portugal in 2009 had a less pronounced recession than the average of the euro area. So the fall in economic activity was less than in the euro area as a whole and the recovery in 2010 was stronger than what occurred in the euro area. However, this budgetary expansion proved unsustainable and the country was pushed into a request for financial aid in the spring of 2011.”  

Since requesting a financial assistance programme totalling €78 billion in April to tide it over until 2014 at below market rates, Portugal has had to submit to austerity strictly overseen by the European Union, ECB and the IMF to keep disbursements flowing. It has done this mainly by cutting spending rather than by increasing revenue. As year-end approaches, the country is on track to deliver a 2011 budget deficit below the imposed limit of 5.9% of GDP. But its new government has just had to impose an even tougher budget for 2012 and there is more pain to come, Gaspar says.

“The effort which is necessary for budgetary consolidation in 2012 is almost double what was envisaged in the original programme. So you can see that what we have in store is quite a substantial adjustment which is explained to a certain extent by the fact that economic activity for the next year is forecast to be substantially lower than what was envisaged in the programme.”

The Portuguese government hopes that 2012 will prove to be the toughest year of adjustment, that it will then return to a primary surplus and, with the private sector already ahead of the government in reducing indebtedness since 2009, the country could be close to eliminating its imbalances in time to return to the markets in 2014. Portugal will seek to finance the current account deficit increasingly through FDI and equity investment and its structural reform effort will encompass a big privatization programme. Strategic partners already being sought to buy a stake in Energias de Portugal. (EDP) It looks hugely optimistic, although the population of a small country may benefit from the necessary sense of being all in it together. Gaspar says:

“The Portuguese did know about this adjustment programme before the elections. The three largest parties subscribed to the adjustment programme, two smaller parties did not and campaigned against the programme. In the end the Portuguese voters supported the three major parties that subscribed to the programme with a majority of about 80 percent which is overwhelming support and an overwhelming consensus.”

Whether Portugal can manage to stick successfully to this programme while much of the rest of Europe also undergoes a deflationary adjustment is the big unknown. Some holders of its debt may note that aim to reach a primary budget surplus next year and wonder.

- Euromoney Skew Blog

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