Is Portugal the new Greece?
Is Portugal the new Greece?
Is Portugal the new Greece?
Last year many analysts and commentators, including those here at D&B, started becoming concerned about the possibility of economic difficulties in Portugal. Sadly for that country, many of those predictions have come to pass.
Credit rating agency Standard & Poor's (S&P) has just downgraded Portugal's national debt from A+ to A-. This follows an earlier downgrade by rating agency Fitch, which dropped the country's rating from AA to AA-.
All this has started to prompt speculation that Portugal may become a repeat of Greece.
As we've all been reading in the news reports, Greece has seen its credit rating downgraded to "junk" by S&P, been forced to offer interest rates in excess of 15% on its government bonds, found itself going cap-in-hand to the EU and IMF for a 45-billion bailout, and now faces speculation that it may actually default on its credit obligations.
Is Portugal next? The next few months will tell.
Greece is certainly in a weak position. Portugal has similar problems, but to a lesser extent. There is a substantial risk of contagion, perhaps even spreading beyond the most vulnerable euro-zone countries (Greece, Ireland, Italy, Portugal, Spain).
However, as D&B economist and euro-zone risk specialist Martin Koehring explains, while there are many important similarities between Greece and Portugal and while the risk of contagion should be kept in mind, there are also significant differences between the two countries.
There's no doubt that Portugal's economy is not in the best of shape. Public debt is a major concern with the annual deficit hitting 9.4% in 2009 and its debt-to-GDP ratio reaching 76.6%. This is a worrying trend which is likely to continue. Our prediction is for the deficit to drop slightly to 8.8% of GDP this year and then 6.9% in 2011.
There has also been a sharp deterioration in the payments performance of Portuguese companies. This critical indicator has noticeably worsened in the first quarter of the year and remains much weaker than the euro-zone average.
All this adds difficulties to an economy that is not especially robust at the best of times. Prior to its euro-zone entry, Portugal made its economic way in the world as a low cost producer. Since entry, it has lost most of that market to eastern Europe and Asia but has failed to improve the sophistication of its economy and workforce to match its more advanced European partners. As a result, with the exception of a developing niche market in renewable energy, the country sits in a sort of uncompetitive middle zone, attractive to few.
Finally, household debt is too high and private consumption too low to adequately power the economy.
All this doom and gloom makes it easy to understand why some may see Portugal as the new Greece. And when that happens it can become something of a self-fulfilling prophecy. Much of the current crisis is a crisis of confidence. If markets lose confidence in Greece, they can quickly lose patience with Portugal as well. But as Martin Koehring points out, the differences between the two should not be ignored.
First of all, Portuguese debt numbers, while of concern, are nowhere near that of Greece. A 77% debt-to-GDP ratio is nothing to be proud of, but it is significantly lower than Greece's 115%.
In addition, Portugal has historically dealt with financial problems better than its Hellenic neighbours. While the population of Greece tends to take to the streets whenever a government introduces austerity measures, the Portuguese place somewhat more confidence in their government and have, in the past, shown more willingness to accept harsh measures.
Fiscal cutbacks from 2004 to 2007 were, if not well received by the people of Portugal, at least accepted as necessary by the vast majority of the population. However, there is a risk that this time round the Portuguese people will be less accommodating of sharp fiscal restraint than they have in the past. Though matters are even worse in Greece, where any attempt to get the national books in order seems to create mass protests and a real threat to the government of the day.
For these reasons and more, we expect the Portuguese to cope with their financial problems somewhat better than the Greeks.
However, one risk factor to be borne in mind is the fact that Portugal currently labours under a minority government which may encounter difficulties persuading other parties to support the required austerity measures. So there is a risk that many of them will be either watered down or even blocked if a wide consensus in parliament cannot be found. This increases the risk that Portugal, similar to Greece, will need strong external pressure, perhaps from the IMF, to make needed changes. In any case, the economic impact of austerity will suppress Portugal's already weak levels of domestic demand and will continue to pose challenges to the national economy.
All of which means that, while media reports may be exaggerated, we believe there are substantial risks that Lisbon may in fact become the new Athens. And after that, who knows? There is a real possibility that Madrid will one day become the new Lisbon.
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