LISBON, Portugal – A thousand days on from its near-economic collapse, Portugal is ready to stand on its own again and is promising not to go back to its bad old spend-happy ways.
On Saturday, after an internationally-mandated makeover, Portugal will become the second country that uses the euro as its currency, after Ireland, to officially shake off its bailout shackles.
Three years ago as the debt crisis fires were engulfing Europe and threatening to derail the whole euro currency project, Portugal’s government was down to its last 300 million euros ($413 million) and facing the imminent prospect of bankruptcy.
To avoid that ignominy, sclerotic Portugal — like overspending Greece and overleveraged Ireland before it — asked and got an emergency financial rescue package from its European partners and the International Monetary Fund.
As with Athens and Dublin, the 78 billion euro bailout came at a price: Lisbon had to submit to a three-year program of deep spending cuts and reforms that stripped away welfare and labour entitlements.
Now, unlike Greece which had to negotiate a second bailout, the Portuguese government says it doesn’t need any more help because investors have shown an appetite to lend money to the country at an affordable rate.
Despite a 0.7 per cent quarterly contraction in the first three months of the year that the Portuguese government blamed on production stoppages at major exporting factories, Portugal’s economy has shown signs of life too over the past year or so.
Its recovery is seen by European political leaders as evidence that the much-maligned austerity prescription was the right medicine for the country’s ills. For many Portuguese, though, the success has come at an unacceptable price and the straitened times are set to continue.
Why is Portugal able to stand on its own feet?
Portugal last month breathed a sigh of relief when investors demonstrated renewed faith in the country’s prospects when flocking to its first sale of long-term government debt since the crisis erupted.
Though the 750 million euros raised was relatively minimal, the ease at which the auction was conducted stood in marked contrast to the prevailing environment in the early part of 2011, when investors wouldn’t touch Portugal’s debt offerings with a 10-foot pole. Paying only around 3.6 per cent is manageable, certainly when compared with the near 17 per cent or so investors wanted three years ago.
“The main goal of the bailout program — to get reasonably-priced financing from markets — has been accomplished,” said Alvaro Almeida of Porto University’s Economics Faculty.
A key step in meeting that target was reducing the budget deficit — the amount the country spends beyond how much it receives in taxes and other revenue. At the end of 2013, that was down at 4.9 per cent of the country’s annual gross domestic product against 10.1 per cent three years earlier.
Growth has also resumed after a three-year recession that sent unemployment sky-rocketing, particularly among the young. The IMF is predicting growth of 1.2 per cent this year, just shy of the average in the 28-country European Union average of 1.6 per cent.
What’s pleasing many, particularly those that advocated the austerity program, has been the unexpected improvement in the country’s exports, which rose by 27 per cent between 2010 and 2013. Foreign sales by the traditional footwear and textile industries grew 40 per cent and 11 per cent respectively over the same period as companies belatedly modernized.
One of the purposes behind the austerity program was to make goods and services more competitive in international markets.
Consumers are also feeling a bit perkier. Passenger car sales, for example, jumped 40.5 per cent in the first quarter, compared with an average 8.4 per cent rise across Europe, according to the Portuguese Automobile Association.
And Portugal had a record year for tourism in 2013, with 14.4 million visitors staying at hotels — 4.2 per cent up on the previous year.
Are there risks of a relapse?
Though Portugal has made great strides in getting a grip on its public finances, it still has a way to go. Portugal’s so-called fiscal adjustment — matching current spending with income — is only about two-thirds complete. The target is for a zero deficit in 2018.
The first quarter economic contraction highlighted the fragility of the recovery especially in such an interconnected economy such as the eurozone.
Unsurprisingly then that Finance Minister Maria Luis Albuquerque has sought to dampen any sense of euphoria — there won’t be any return to the bad old ways when Portugal’s economy driven by cheap credit related to its membership of the euro camouflaged deep-rooted problems.
“It’s not like we’ve struck oil,” Albuquerque said recently. “The Portuguese economy is still fragile … structural reforms start to bear fruit after three years, but they’re not completed after three years.”
Government debt remains high, at 129 per cent of GDP last year, way above the EU average of 87.1 per cent. That is one of the long-term worries that have kept Portuguese bonds classified as junk by the three main international ratings agencies.
And politically, there is no broad, cross-party endorsement for the path to follow like there was with the 2011 bailout agreement.
Ahead of next year’s general election, the main opposition centre-left Socialist Party has a clear lead in opinion polls. Its leader, Antonio Jose Seguro, insists measures must be redirected towards growth instead of cuts to “reduce inequality and create jobs.”
But the worst is over, isn’t it?
When the Portuguese wake up on May 18, their economic lives will be no different from the day before.
“The future will be very demanding,” Prime Minister Pedro Passos Coelho warned.
And in a further reality check, President Anibal Cavaco Silva pointed out that Portugal won’t have paid back 75 per cent of its bailout loan until 2035 — and until then, it will be subject to close financial monitoring by its foreign creditors, who want to ensure they get their money back.
“Portugal: 20 years a slave,” as one local newspaper had it.
That’s hardly a headline that’s going to create a buzz in a country that seen living standards tumble and over 200,000 people, feeling their aspirations crushed, emigrating over the past three years.
Some 2 million adults — about one-fifth of the population — lived on around 400 euros a month last year, according to the National Statistics Institute. It is a low-wage economy that seems out of place in 21st-century western Europe.
Many Portuguese have protested, marched and staged strikes, but they couldn’t stop the austerity policies.
“I just feel like everything is going on above my head, I don’t have much of a say in anything,” said Susana Marques, a Lisbon city council gardener who earns the national minimum wage of 485 euros a month. “All I can do is keep trying to make ends meet.”