2010–14 Portuguese financial crisis

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The Great Recession in Portugal[1][2] led to the country being unable to repay or refinance its government debt without the assistance of third parties. To prevent an insolvency situation in the debt crisis Portugal applied for bail-out programs and has drawn a cumulated €79.0 billion (as of November 2014) from the International Monetary Fund (IMF), the European Financial Stabilisation Mechanism (EFSM), and the European Financial Stability Facility (EFSF).

Greece and Ireland also went into a debt crisis in 2010. Together these debt crisis of these three countries marked the start of the European sovereign debt crisis.

Causes[edit]

From 2005 to 2011, José Sócrates of the Socialist Party (PS) was the prime minister and the leader of the Portuguese Government.

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.

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.

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 under performing 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.[6]

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.[7] 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.[7] However, the Portuguese economy had been creating its own problems over a lengthy period of time, which came to a head with the financial crisis. Persistent and lasting recruitment policies boosted the number of redundant public servants. Risky credit, public debt creation, and European structural and cohesion funds were mismanaged across almost four decades.[citation needed]

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]

Austerity measures amid increased pressure on government bonds[edit]

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 well above the European Union's Stability and Growth Pact three percent limit. In November 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]

In the first half of 2011, Portugal requested a €78 billion IMF-EU bailout package in a bid to stabilise its public finances.[128] After the bailout was announced, the Portuguese government headed by Pedro Passos Coelho managed to implement measures to improve the State's financial situation and the country started to be seen as moving on the right track.[citation needed] This also led to a strong increase of the unemployment rate to over 15 per cent in the second quarter 2012 and it is expected to rise even further in the near future.[129]

Economic Adjustment Programme for Portugal[edit]

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 on 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 the ECB announced they will be ready also, to begin additional support to Portugal, with some yield-lowering bond purchases (OMTs), when the country regained complete market access.[11] 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"),[12] and as of 24 November 2012 has been more than halved to only 7.9%.[13]

Rejection of Austerity Conditions and Political Crisis[edit]

In the parliamentary elections of October 2015, the ruling right wing party failed to achieve an operating majority. An anti-austerity post-electoral left wing coalition was formed achieving 51% of the vote and 53% of elected MPs, however, the President of Portugal at first refused to allow the left wing coalition to govern, inviting the minority right wing coallition to form a government. This was formed in November 2015 and lasted 11 days when it lost motion of confidence. The President eventually invited and asked the Socialist Party to form a fovernment party supported by 123 of 230 MPs in parliament from all parties except the former right wing coallition which broke into two parties. The new government (of the Socialist Party and independednts) took office in November 3025 with a parliamentary majority thanks to the support of the Left Bloc, the Greens and the Communist Party and the abstention of the Animal Welfare Party )PAN). Because of the political conditions of the bail out package the financial crisis had spread to being a political crisis which is now over, as the country exited the bail out and the procedure for excessive deficit being now on track to meet its 2018 and 2019 targets after having met the EC/ECB/IMF conditions, unlike its predecessor. Key economic data

- Budget deficit in 2016 was 2.1% of GDP, 0.4% the arbitary limit set for it by the EC, the lowest since 1974 and less than half of the previous government's last year in power 2015. It is also 0.9% below the limits agreed at Maastricht. - In 2016 Portuguese GDP was $259 billion up by about 3% from 2015, and 21% from the its record low in 2012. - In 2016 Portugal registered a 14-year sequence of continuous increases in debt-to-GDP ratios, i.e., since the adoption of the Euro as currency - In 2016 combined sovereign and personal debt in Portugal was the 5th largest in the Eurozone reaching a combined 390% of GDP - In April of 2017 the unemployment rate was 9.5%, over 8% below the all time high reached in 2013 though still slightly above the 43 year average since the country became a democracy. - The financial crisis with the bail conditions of austerity created a social crisis in the country from 2011 to 2015 which was mismanaged by the right-wing government and led to its defeat in 2015.

See also[edit]

References[edit]

  1. ^ "The Great Recession in Portugal: Impact on hospital care use". 24 December 2014. Retrieved 24 December 2014. 
  2. ^ "The elections of the Great Recession in Portugal: performance voting under a blurred responsibility for the economy". 
  3. ^ [1]
  4. ^ [2]
  5. ^ [3]
  6. ^ (English) 'Merkel Economy Adviser Says Greece Bailout Should Bring Penalty', archived from the original on 19 February 2010, retrieved 15 February 2010 
  7. ^ a b Portugal’s Unnecessary Bailout – The New York Times
  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 seeks market access with $5 bln bond exchange". Kathimerini (English Edition). 3 October 2012. Retrieved 17 October 2012. 
  12. ^ "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. 
  13. ^ "Portugal 10-Year Futures Historical Data". ForexPros.com. 24 November 2012. Retrieved 24 November 2012.