2010–14 Portuguese financial crisis

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The 2010–2014 Portuguese financial crisis began as part of the world financial crisis of 2007–08 and continues as part of the European sovereign debt crisis, which has affected primarily the southern European states and Ireland.[citation needed]


From 2005 to 2011, José Sócrates of the Socialist Party (PS) was the prime minister and the leader of the Portuguese Government. According to his right wing political opponents, Sócrates's term in office will be remembered as one of the worst periods in the post-World War II economic history of Portugal, due to record high unemployment, loss of family purchasing power, and the economic downturn—the Portuguese State was forced to declare bankruptcy. Income taxes in Portugal rose considerably to make inroads into the nation's huge deficit. It was the third time that external financial aid was requested from the IMF—the first occasion occurred in the late 1970s following the Carnation Revolution.

A report that was released in January 2011 by the Diário de Notícias,[1] and published in Portugal by Gradiva, demonstrated that, in the period between the Carnation Revolution of 1974 and 2010, the democratic Portuguese Republic governments encouraged over-expenditure and investment bubbles through unclear public–private partnerships. Also, the funding of numerous ineffective external consultancy/advisory committees and firms was an issue. This allowed considerable slippage in state-managed public works, inflated top management and head officer bonuses and wages, and established recruitment policies boosted the number of redundant public servants. Risky credit, public debt creation, and European structural and cohesion funds were mismanaged over nearly four decades.[1]

In 2005, the number of public employees per thousand inhabitants in the Portuguese Administration (70,8) was above the European Union (EU) average (62,4 per thousand inhabitants), but in 2011, the number of Portuguese public employees had not ceased to increase while the EU average had decreased. Already internationally known for decades as excruciatingly slow and inefficient for European Union and USA standards, Portugal's justice system was by 2011 the second slowest in Western Europe after Italy's, even though it has one of the highest rates of judges and prosecutors, over 30 per 100,000 people, a feature that plagued the entire Portuguese public service, reputed for its overcapacity, useless redundancies and a general lack of productivity as a whole.[2]

After the financial crisis of 2007–2008, it was known in 2008–2009 that two Portuguese banks (Banco Português de Negócios (BPN) and Banco Privado Português (BPP)) had been accumulating losses for years due to bad investments, embezzlement and accounting fraud. The case of BPN was particularly serious because of its size, market share, and the political implications - Portugal's then current President, Cavaco Silva, and some of his political allies, maintained personal and business relationships with the bank and its CEO, who was eventually charged and arrested for fraud and other crimes.[3][4][5] In the grounds of avoiding a potentially serious financial crisis in the Portuguese economy, the Portuguese government decided to give them a bailout, eventually at a future loss to taxpayers.

Since 2005, incumbent Prime Minister Sócrates's cabinet was not able to forecast or prevent the largely unanticipated imminent collapse of the Portuguese public finances and banking system and successfully stimulating the economy together with providing a solution for the unsustainable debt service coverage ratio of Portugal. Later in its term, the government was incapable of doing anything to improve the situation when the country was declared on the verge of bankruptcy by 2011.[6]


Anxiety on financial markets[edit]

Prime Ministers Pedro Passos Coelho, from Portugal (left) and Rodriguez Zapatero, from Spain (right), in October 2011 - with economic downturn and a rising unemployment rate (over 10% unemployment rate in Portugal and 20% in Spain by 2011), the two countries of the Iberian Peninsula were trapped right in the middle of the European sovereign debt crisis.

In the opening weeks of 2010, renewed anxiety about the excessive levels of debt in some EU countries and, more generally, about the health of the Euro spread from Ireland and Greece to Portugal, Spain, and Italy. In 2010, PIIGS and PIGS acronyms were widely used by international bond analysts, academics, and the international economic press when referring to these underperforming economies.

Some senior German policy makers went as far as to say that emergency bailouts to Greece and future EU aid recipients should bring with it harsh penalties.[7]

In the summer of 2010, Moody's Investors Service cut Portugal's sovereign bond rating down two notches from an Aa2 to an A1[8] Due to spending on economic stimuli, Portugal's debt had increased sharply compared to the gross domestic product. Moody noted that the rising debt would weigh heavily on the government's short-term finances.[9] Earlier in the year, Portugal was one of the countries identified in the 2010 Euro Crisis as concern spread over increasing government deficit and debt levels in certain countries.

Austerity measures amid increased pressure on government bonds[edit]

International financial markets compelled the Portuguese Government led by Prime Minister José Sócrates, to make radical changes in economic policy, like other European governments had done before. Thus, in September 2010, the Portuguese Government announced a fresh austerity package following other Eurozone partners, through a series of tax hikes and salary cuts for public servants. In 2009, the deficit had been 9.4 percent, one of the highest in the Eurozone and way above the European Union's Stability and Growth Pact three percent limit.

In November 2010, risk premiums on Portuguese bonds hit euro lifetime highs as investors and creditors worried that the country would fail to rein in its budget deficit and debt. The yield on the country's 10-year government bonds reached 7 percent – a level the Portuguese Finance Minister Fernando Teixeira dos Santos had previously said would require the country to seek financial help from international institutions. Also in 2010, the country reached a record high unemployment rate of nearly 11%, a figure not seen for over two decades, while the number of public servants remained very high.

On 23 March 2011, José Sócrates resigned following passage of a no confidence motion sponsored by all five opposition parties in parliament over spending cuts and tax increases.[10]

Bailout loan, bank rescue and further austerity measures[edit]

In the first half of 2011, Portugal requested a €78 billion IMF-EU bailout package in a bid to stabilise its public finances.[11] These measures were put in place as a direct result of decades-long governmental overspending and an over bureaucratised civil service.

On 6 April 2011, the resigning Prime Minister José Sócrates announced on the television that the country, facing a status of bankruptcy, would request financial assistance to the IMF (at the time managed by Dominique Strauss-Kahn) and the European Financial Stability Facility, like Greece and the Republic of Ireland had done before. Robert Fishman, in the New York Times article "Portugal's Unnecessary Bailout", points out that Portugal fell victim to successive waves of speculation by pressure from bond traders, rating agencies and speculators.[12] In the first quarter of 2010, before pressure from the markets, Portugal had one of the best rates of economic recovery in the EU. From the perspective of Portugal's industrial orders, exports, entrepreneurial innovation and high-school achievement, the country matched or even surpassed its neighbors in Western Europe.[12]

On 16 May 2011, the eurozone leaders officially approved a €78 billion bailout package for Portugal, which became the third eurozone country, after Ireland and Greece, to receive emergency funds. The bailout loan was equally split between the European Financial Stabilisation Mechanism, the European Financial Stability Facility, and the International Monetary Fund.[13] According to the Portuguese finance minister, the average interest rate on the bailout loan is expected to be 5.1 percent.[14] As part of the deal, the country agreed to cut its budget deficit from 9.8 percent of GDP in 2010 to 5.9 percent in 2011, 4.5 percent in 2012 and 3 percent in 2013.[15]

In order to accomplish the European Union/IMF-led rescue plan for Portugal's sovereign debt crisis, in July and August 2011 the new government led by Pedro Passos Coelho announced it was going to cut on state spending and increase austerity measures, including public servant wage cuts and additional tax increases.

On 6 July 2011, the ratings agency Moody's had cut Portugal's credit rating to junk status, Moody's also launched speculation that Portugal could follow Greece in requesting a second bailout.[16]

After the bailout was announced, the Portuguese government headed by Pedro Passos Coelho managed to implement measures to improve the State's financial situation, including tax hikes, a freeze of civil service-related lower-wages and cuts of higher-wages by 14.3%, on top of the government's spending cuts. The Portuguese government also agreed to eliminate its golden share in Portugal Telecom which gave it veto power over vital decisions.[17][18] In 2012, all public servants had already seen an average wage cut of 20% relative to their 2010 baseline, with cuts reaching 25% for those earning more than 1,500 euro per month. This led to a flood of specialized technicians and top officials leaving the public service, many looking for better positions in the private sector or in other European countries.[19]

In December 2011, it was reported that Portugal's estimated budget deficit of 4.5 percent in 2011 would be substantially lower than expected, due to a one-off transfer of pension funds. The country would therefore meet its 2012 target a year earlier than expected.[15] Despite the fact that the economy is expected to contract by 3 percent in 2011 the IMF expects the country to be able to return to medium and long-term debt sovereign markets by late 2013.[20] Any deficit means increasing the nation's debt. To bring down the debt to sustainable levels will require a 10% budget surplus for several years according to some estimates.[21]

In the following months the country started to be seen as moving on the right track. However, the unemployment level rose to over 15 percent in the second quarter 2012 and it was expected to rise even further in the near future.[22]

On 7 June 2012, Portugal's largest listed bank by assets Millennium bcp was rescued by the Portuguese Government headed by Passos Coelho, through 3 billion euros ($3.8 billion) in state funds it took from the country's bailout package.[23]

In January 2013, the European Commission approved, under EU state aid rules, a rescuing recapitalisation totalling €1.1 billion granted by Portugal to Banco Internacional do Funchal S.A. (Banif) for reasons of financial stability. The Portuguese Republic committed to provide a far-reaching restructuring plan for Banif by 31 March 2013.[24]

Re-access to financial markets[edit]

A positive turning point in Portugal's strive to regain access to financial markets, was achieved on 3 October 2012, when the state managed to convert €3.76 billion of bonds with maturity in September 2013 (carrying a 3.10% yield) to new bonds with maturity in October 2015 (carrying a 5.12% yield). Before the bond exchange, the state had a total of €9.6 billion outstanding notes due in 2013, which according to the bailout plan should be renewed by the sale of new bonds on the market. As Portugal was already able to renew one-third of the outstanding bonds at a reasonable yield level, the market now expect the upcoming renewals in 2013 also to be conducted at reasonable yield levels. The bailout funding programme will run until June 2014, but at the same time require Portugal to regain a complete bond market access at the latest in September 2013. The recent sale of bonds with a 3-year maturity, was the first bond sale of the Portuguese state since requesting the bailout in April 2011, and the first step slowly to open up its governmental bond market again. Recently ECB announced they will be ready also to begin an additional support to Portugal with some yield-lowering bond purchases (OMTs), when the country regain complete market access by issuing a bond series with a full 10-year maturity.[25] All together this bodes well for a further decline of the governmental interest rates in Portugal, which on 30 January 2012 had a peak for the 10-year rate at 17.3% (after the rating agencies had cut the governments credit rating to "non-investment grade" -also referred to as "junk"),[26] and as of 24 November 2012 has been more than halved to only 7.9%.[27] A successful return to the long-term lending market was made by the issuing of a 5-year maturity bond series in January 2013,[28] and the state managed to regain complete lending access when it successfully issued a 10-year maturity bond series on 7 May 2013.[29][30]

Portugal’s debt was in September 2012 forecasted by the Troika to peak at around 124% of GDP in 2014, followed by a firm downward trajectory after 2014. Previously the Troika had predicted it would peak at 118.5% of GDP in 2013, so the developments proved to be worse than first anticipated, but the situation was described as fully sustainable and progressing well. As a result from the slightly worse economic circumstances, the country has been given one more year to reduce the budget deficit to a level below 3% of GDP, moving the target year from 2013 to 2014. The budget deficit for 2012 has been forecasted to end at 5%. The recession in the economy is now also projected to last until 2013, with GDP declining 3% in 2012 and 1% in 2013; followed by a return to positive real growth in 2014.[25]

See also[edit]


  1. ^ a b ""O estado a que o Estado chegou" no 2.º lugar do top". Diário de Notícias (in Portuguese). 2 March 2011. Retrieved 12 May 2013. 
  2. ^ Insight: Rushed Portugal justice reform risks more error than trial, Reuters (Sep 19, 2012)
  3. ^ [1]
  4. ^ [2]
  5. ^ [3]
  6. ^ (Portuguese) Grande investigação DN Conheça o verdadeiro peso do Estado, Diário de Notícias (7 January 2011)
  7. ^ (English) 'Merkel Economy Adviser Says Greece Bailout Should Bring Penalty', retrieved 15 February 2010 
  8. ^ Bond credit ratings
  9. ^ BBC News -Moody's downgrades Portugal debt
  10. ^ "Portuguese parliament votes against austerity plan". France 24. 23 March 2011. Retrieved 23 March 2011. 
  11. ^ "Portugal requests bailout". Christian Science Monitor. Retrieved 30 June 2012. 
  12. ^ a b Portugal’s Unnecessary Bailout – The New York Times
  13. ^ Gavin Hewitt (2011-05-16). "Portugal's 78bn euro bail-out is formally approved". Bbc.co.uk. Retrieved 2012-05-16. 
  14. ^ Winning, Nicholas (16 May 2011). "Portugal Fin Min: Average Rate On EU/IMF Loan Is Around 5.1%". The Wall Street Journal. Retrieved 6 June 2012. 
  15. ^ a b "Portugal 2011 deficit to beat goal on one-off revs-PM". Reuters UK. 13 December 2011. Retrieved 30 December 2011. 
  16. ^ "Portugal's credit rating slashed", Business Spectator, 6 July 2011
  17. ^ Kowsmann, Patricia, "Portugal govt ends golden-share holdings" (Paid content), Dow Jones Newswires 5 July 2011.
  18. ^ "Portugal Government Ends Golden-Share Holdings". The Wall Street Journal. 5 July 2011. Retrieved 20 July 2011. 
  19. ^ Institute of Management Technology Nagpur: "Eurocrisis", Okonomist, Vol.1, Issue 3, January 2012
  20. ^ "Good Progress But Testing Times Ahead For Portugal". IMF. 22 December 2011. Retrieved 30 December 2011. 
  21. ^ Chip Krakoff (Feb 17, 2012). "PIIGS To The Slaughter: After Greece, Portugal". Seeking Alpha. Retrieved May 21, 2012. 
  22. ^ Portugal Q2 Unemployment Rate Rises To Record High, RTTNews (August 14, 2012)
  23. ^ Portugal's BCP says to start repaying state funds early, Reuters (7 June 2012)
  24. ^ EC approves Banif rescue recapitalisation, theportugalnews.com (January 24, 2013)
  25. ^ a b "Portugal seeks market access with $5 bln bond exchange". Kathimerini (English Edition). 3 October 2012. Retrieved 17 October 2012. 
  26. ^ "Data archive for bonds and rates (Ten-year government bond spreads on 30 January 2012)" (PDF). Financial Times. 30 January 2012. Retrieved 24 November 2012. 
  27. ^ "Portugal 10-Year Futures Historical Data". ForexPros.com. 24 November 2012. Retrieved 24 November 2012. 
  28. ^ "Portugal Sells Five-Year Bonds for First Time in Two Years". Bloomberg. 24 January 2013. 
  29. ^ "The European Stability Mechanism May 2014" (PDF). European Stability Mechanism (ESM). 5 May 2014. 
  30. ^ "Portugal sells 10-year bonds for first time since bailout". El Pais. 7 May 2013.