Special Report by Chris Graeme chris.graeme@theresidentgroup.com
A group of leading economists and former finance ministers is to meet with President Cavaco Silva on Monday to warn him that Portugal simply cannot afford the government’s planned public works schemes.
The news broke on Tuesday this week following an announcement over the weekend that the European Union had agreed a 110 billion euro bailout package to stop Greece from going bankrupt.
Already debt-stricken Portugal will have to stump up two billion euros – the cost of three new submarines – as part of that agreed IMF/EU Greek bailout package.
The IMF had originally proposed a more modest 45 billion euro interim package for Greece but German prevarication over the past two weeks and Standard & Poors’ decision to downgrade Greece’s sovereign bonds to junk status has increased investor jitters over the past few days requiring more money to calm the markets.
At the end of April, following the same ratings agency decision to downgrade the value of Portugal’s sovereign debt, Prime Minister José Sócrates and the new leader of the PSD opposition, Pedro Passos Coelho, showed a rare sign of unity by holding a joint press conference to assure the world’s media and panicked investors that Portugal was “doing everything it could” to resolve its budgetary problems.
So far, the government has announced an Emergency Austerity Package with immediate effect, which will bring forward measures that had already been agreed by the government for 2010-2013.
This includes freezing public sector pay, capping unemployment benefits for out-of-work medium and high salary employees in a bid to get them back to work.
In practise it means a cut of 25 per cent in dole handouts.
The government will also tighten up the rules and eligibilities for other social handouts as well as taxing assets and stock market windfalls more heavily.
“This is a decisive moment. The government has to respond to this attack from the markets. It’s time for the government and parties, particularly the PSD, to reach an understanding. This is no time for pointless squabbles,” warned current Finance Minister Fernando Teixeira dos Santos on April 27.
However, leading economists and former finance ministers said the package wasn’t enough. In signs that the government was itself splitting, the Minister for the Economy, José Vieira da Silva, called the measures “a handful of nothing” while the so-called ‘Old Men of Restello’, who believe Portugal’s situation is more serious than the government is letting on, are to petition Cavaco Silva.
Economists such as Medina Carreira, Eduardo Catroga, Bagão Felix, Pina Moura, Luís Campos e Cunha, João Salgueiro, Manuela Ferreira Leite, Miguel Beleza and Ernâni Lopes have asked for an audience with the President to debate the country’s financial crisis.
Last year Portugal’s budget deficit reached 9.3 per cent of GDP and the public debt soared to 77 per cent of GDP.
Not only that, its 10-year bond yields – the amount of interest Portugal has to pay to investors in return for buying the country’s debt – rose to 5.7 per cent on April 28, the highest rate in a decade.
Although the government insists it is different from Greece and is “under attack from speculators”, it shares three weaknesses with Greece: its economy is small and not sufficiently diversified. That means investors can reject Portuguese bonds and buy up safer German or French debt.
Secondly, the country simply isn’t competitive and its projected growth is weak, running at 0.3 per cent per annum while its overall growth between 2000 and 2009 never really grew beyond an average of one per cent.
Thirdly, Portugal has relied too heavily on external borrowing rather than internal borrowing to finance itself.
This goes for its banking sector and private companies as much as it does for the State. Its current account deficit averaged nine per cent of GDP between 2001 and 2008.
Lastly, Portugal’s net international debt (all debts minus assets) was a whopping 96 per cent of GDP in 2008, which is worse than Greece.
The economists will argue on Monday that with low productivity and weak exports Portugal simply cannot justify a new airport, a TGV rail link and new roads to ferry non-existent goods to non-existent markets.
