While some comparisons can be drawn between Portugal and Greece, the two countries differ markedly. In Greece, economic disrepair, political upheaval and social unrest collectively fomented a national crisis, unique in its potential to spread to other vulnerable European countries. The Portuguese economy likewise is shaky, but socially the country has been less volatile than Greece. Protests occur infrequently, and those that have occurred were fairly peaceful.
Portugal also enjoys political support at home and abroad. While a technocratic government was installed in Athens, the Portuguese democratically elected a new government that so far has complied with bailout directives. The troika has touted Portugal as an example of discipline and responsibility -- at least for a country that received a bailout.
In 2012, the Portuguese economy is expected to shrink by more than 3 percent -- it contracted 1.5 percent in 2011 -- and government debt remains high. When Portugal received a bailout in May 2011, Lisbon's debt-to-gross domestic product (GDP) ratio was 107 percent. This ratio is set to reach 113 percent over the next two years. The debt-to-GDP ratio grew so large because Lisbon carried the debts of some state-owned enterprises and regional governments from 2008 to 2010. Already 2012 appears to be an expensive year, as Lisbon must draw from the 12 billion-euro (about $16 billion) EU-IMF bank recapitalization package.
Household debt in Portugal also remains high at 94 percent of GDP, one percentage point lower than the country's all-time high in 2009. (For reference, U.S. household debt is more than 120 percent of GDP). Since 2009, corporate debt has stayed at 130 percent. The unemployment rate rose to 14 percent at the end of 2011. Unemployment is particularly high among the country's youth at about 35 percent.
The Portuguese banking sector also is in trouble. In February 2011, more than 34,000 families reportedly stopped repaying loans to banks. The number of Portuguese who stopped paying their mortgages rose by 450 percent last year. In addition, around 9,000 businesses have failed to pay their monthly installments to banks. In an attempt to soothe the markets, the Bank of Portugal issued a statement in early 2012 indicating that banks' Core Tier 1 capital stood at 8.5 percent at September 2011. According to the statement, by the end of 2011 the banks had met the requirement from the European Banking Authority to shore up their core capital base to 9 percent by June 2012.
Portugal's economy is not as integrated into the European economy as those of other nations. Exports account for roughly 25 percent of Portuguese GDP, well below the European average of 40 percent, and its export end up at relatively few destinations. About a quarter of its exports go to Spain, which has an economy as fragile as Portugal's. Indeed, many of Portugal's main trading partners are expected to undergo economic downturns in 2012. This would undermine any contribution that exports -- Portugal's primary economic driver since 2009 -- make to the Portuguese economy.
In June 2011, now Portuguese Prime Minister Pedro Passos Coelho led the center-right Social Democratic Party to an electoral victory, earning his party 108 seats in parliament. He then formed a coalition with the People's Party, which contributed an additional 24 seats. Total, the coalition has 132 seats, more than half of the 230-member parliament.
Notably, the political opposition in Portugal is weak and divided, with the main opposition party, the Socialist Party, falling into disrepair. After losing in the June 2011 elections, former Prime Minister Jose Socrates left the party leadership and was replaced by member of parliament Jose Antonio Jose Seguro. The party holds only 74 seats in parliament -- fewer than at any point in 20 years. The party fell out of favor with the public for its mismanagement of the financial crisis, and its support of the bailout makes it difficult to reach an agreement with other left-wing parties.
Portugal's two main unions are likewise divided. On Jan. 17, the government approved a labor reform package that shortened workers' annual vacation entitlements, scrapped at least three public holidays, reduced severance payments and cut overtime pay rates. The country's second largest union, the General Union of Workers (UGT), supported the reform package, but the largest union, the General Confederation of Portuguese Workers (CGTP), did not. After the deal was passed, the CGTP harshly criticized the UGT for supporting the government.
So far, the economic problems facing Portugal have provoked little social unrest. Despite the passing of the controversial labor reform package, unions have staged only one general strike, which occurred in November 2011 and stayed relatively peaceful. And while another 300,000-worker demonstration took place Feb. 11, the incident also remained peaceful.
Several factors explain this phenomenon. First, the government's most stringent austerity measures have yet to be implemented; these measures will take effect in 2012. Second, the country is divided over support of the austerity measures. According to a February 2012 poll, 48.4 percent of the country believe austerity is not the best way out of the financial crisis, while 40.3 percent believe austerity needs to be implemented.
Interestingly, emigration has proven useful in dealing with the crisis. In 2011, some 120,000 citizens left the country, many for economic reasons. With a total population of 10.6 million people, 120,000 is a substantial number. Many of these emigrants go to Brazil and Angola, two former colonies with similar cultures. Brazil's National Secretariat of Justice reported that the number of applications for permanent residence filed by Portuguese emigrants rose from 276,703 to 328,856 between December 2010 and June 2011. These numbers do not include temporary work, study and research visas issued to Portuguese citizens. And according to the Portuguese government's newly established Emigration Observatory, in 2006 only 156 Angolan visas were issued to Portuguese citizens, compared to 23,787 issued in 2010.
Comparison with Greece
If Greece has exemplified how badly the bailout process can go, Portugal exemplifies the opposite.
The Portuguese government has largely complied with the troika's directives for reducing its deficit. Lisbon is expected to receive another 14.9 billion-euro tranche, approved the week of Feb. 26, in April. This will bring the total amount that Portugal has received to roughly 47 billion euros, or about 60 percent of what it is slated to receive.
Part of the troika's bailout package requires Portugal to cut its budget deficit to 4.5 percent of GDP in 2012 from 5.9 percent in 2011. In November 2011, the new government approved its first package of austerity measures. The measures included pension cuts, reductions in health spending and welfare benefits and privatization of state-owned companies. Heads of the troika have visited Lisbon three times since the bailout, and in all instances have praised the government, saying Portugal was meeting the troika's expectations.
In January, Coelho said he wanted to implement measures "beyond even those requested by creditors." He said the country would not ask for a renegotiation of its bailout and that it continues to meet all targets being set under the program. Several EU and IMF officials have praised Portugal's management of the crisis. Then in February, Portuguese Finance Minister Vitor Gaspar announced that the government in 2012 would intensify structural economic reforms and regain access to debt markets. The government also pledged to speed up implementing EU initiatives on energy, postal services and the railway industry. Additional labor reforms are also being planned.
However, many bank and rating agency analysts believe Portugal will not be able to return to the markets in 2013 and will instead need at least 29.5 billion euros in additional support. A disorderly Greek default likely would render Portugal unable to access long-term market funding by September 2013 as planned -- in which case it may have to restructure its debt. It is unclear whether Portugal will require another bailout, but most economists believe Lisbon would easily get one if it needed.
Because of its adherence to troika directives, Portugal is widely believed to be a worthy investment if necessary. German Finance Minister Wolfgang Schaeuble on Feb. 9 said the troika would be ready to adjust Portugal's program if necessary.
With a majority in parliament and a relatively pacified public, the government in Lisbon enjoys much more domestic political support than its Greek counterpart. And, as noted, Lisbon's benefactors continue to support it. This mitigates the short-term threat of political crisis.
However, the Portuguese economy is in a precarious place. Without growth, reducing debt levels becomes nearly impossible. (Even before the current crisis, Portugal was among Europe's slowest-growing economies.) According to the Kiel Institute Barometer of Public Debt, Portugal would need to produce a primary surplus of around 8-10 percent of GDP in the next decade to reduce its debt ratio to a permanently manageable level. The same report said Portugal would need to cut its debt by one-third to one-half.
Portugal is not immune to the Greek contagion. Stratfor has identified two scenarios with the potential to affect Portugal in significant ways. First, Portugal may ask the troika to soften its conditions of its bailout or, like Greece, pay back a lower amount than what it was lent.
Were Portugal to ask for softer measures, we expect Lisbon to try to negotiate a settlement with the IMF and European Union. Otherwise, Portugal could try to restructure its debt. While the government has denied rumors to this effect, the possibility cannot be ruled out.
What may also help Lisbon avoid outright default is that Spanish banks own a great deal of Portuguese debt -- a November 2011 report from the Bank for International Settlements puts the figure at about 65 billion euros. If Portugal defaulted, Spain would scarcely be able to recover the billions of euros it lent Portugal, increasing the likelihood of future Spanish default. Because Spain is far more integrated into the European economy than Portugal, the troika is keenly interested in this potentiality.
Portugal's economic well-being is not completely contingent on that of Greece, as Greek instability and low growth prospects have kept Portuguese bond yields high. Though Greece's economic "recovery" no doubt will affect Portugal -- the second bailout for Athens certainly will benefit Lisbon -- the Iberian country can insulate itself from Greek contagion for at least this year.
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European Economies At Risk - Portugal is republished with permission of STRATFOR.