Our Opinion: 2016

Did Portugal’s bailout work?

It is always a pleasure being in Lisbon. Yet, there are more people around my hotel begging for money than I have seen before, and there is certainly not the feeling of an economy emerging strongly after the debt crisis.

Between 2011-2014, Portugal was given a bailout of €78bn. At the time, differentiating Portugal’s problems from those in Greece were seen as important for reducing the risk of a Euro-zone break up.

Fears that Portugal would default on its debts were a key concern in markets at the time. Its lenders agreed not to pursue a restructuring of public debt since there were concerns that it would cause significant turmoil in European financial systems, at a time of great uncertainty.

Portugal’s bailout came at the height of Europe’s debt crisis, after Greece and Ireland were forced to seek emergency funding packages. It was intended to restore confidence, return the country to growth and reduce its large debt burden.

Did the bailout work? 

It definitely ensured a return to the international bond markets, and the credibility that gives, but has left high debts, weak banks and high unemployment.

The International Monetary Fund, who contributed a third of the bailout, recently confirmed that the programme was only a “qualified success,” pointing to the fact that it avoided a banking crisis.

But it also said “Portugal was left with unfinished business. Public and private debt remain high; banks still have balance sheet weaknesses; the unemployment rate remains in double digits; and the competitiveness gap has only partly been closed,”

When Lisbon exited the programme in 2014, many European officials held the country up as a success story in reforming its economy and returning to growth. However, the recovery has, so far, been modest.

The IMF said separately last month that a review of the country found the economy was “losing momentum”. It said growth had slowed due to weaker exports and sluggish investment, which is being held back by uncertainty and high levels of corporate debt.

Portugal’s GDP growth forecasts have been lowered following the UK referendum. Just 1% growth is forecast for this year, and 1.1% for next. This is despite very favorable conditions, including a strong decline in funding costs, a low oil price, a weaker euro, and the sound growth of its main trading partner Spain.

Unemployment remains over 11%

The IMF concluded that the bailout “fell short of achieving all its goals” because the impact of the country’s three-year recession was underestimated and fiscal adjustment was less than planned.

The bailout programme had envisaged that Portugal’s public debt would peak at 115% of GDP in 2013 and then decline. Instead, it is expected to be over 128% next year.

The Council of the EU has twice extended the deadline for Portugal to suggest and implement consolidation measures aimed at bringing the deficit down. In return, the Portuguese Government has reiterated its commitment to fiscal targets.

Portugal’s resources, people and global outlook ensure it will have a prosperous future. But, for now, the bond and equity markets are probably best avoided.

13th October 2016