Is Portugal's debt burden unsustainable without another default?

10th January 2014 by The Harried House Hunter

One of the themes of this blog has been that Portugal is facing a debt crisis that sooner or later will end in it defaulting in a similar manner to that of Greece. This has been driven by two trends in the two major factors in such a decision. Firstly sustained economic growth is something that eluded Portugal even in the better years before the credit crunch when even then it struggled to grow at an average of 1% per annum. Secondly it has failed to get its budget deficit under control -partly because economic growth has again underperformed- and therefore its national debt has surged. These two factors have become enmeshed as negative economic growth combined with a rising national debt has seen the national debt to economic output ratio (Gross Domestic Product) shoot higher.

It was not supposed to be like this

If we move into a world apparently even better than being “on track” then as I pointed out on the 27th of November this was supposed to be the situation now.

The national debt to GDP ratio was supposed to peak at 114.9% this year but fall in subsequent years because the fiscal deficit was supposed to be 3% of GDP and declining.

Or to put it another way.

This will stabilize public sector debt by 2013.

Instead we face a reality where the national debt to GDP ratio hit 131.3% at the end of the second half of 2013. Not only is this well above the 120% benchmark set by the Euro area authorities in the Greek default process but it had risen by 3.8% on the previous quarter and by 13.1% on a year before. Ouch you might say! But it is also true that the deficit remains much higher than the official forecasts and fantasies and will be in the range 5.5% to 6% of GDP for 2013.

Actually there are also other problems

A report by the Organisation for Economic Cooperation and Development believes that Portugal has responded to this problem at least partly by changing the numbers rather than the position.

Precarious fiscal consolidation recurrently lead to off budget public spending solutions

According to this existing schemes have been added to considerably since the bailout began such that.

Portugal lead PPP projects when measure by the size of the GDP

It argues that a lot of problems such as bad management and poor value have come from this but for today’s purposes the main issue is that the total scale amounted to approximately 10.2% of GDP (and rising since). So a true calculation of Portugal’s national debt position requires this to be added to it.

Also these type of private/public-sector partnerships have something which is very familiar from the UK experience.

PPP renegotiations have systematically increased the payments for public

Costs for this sort of thing have a clear tendency to follow this from the Electric Light Orchestra.

You took me ohh higher and higher baby

Tortus Capital

They have entered the debate on this subject with this.

Actual government debt adds up to 147% of GDP (if you include state guaranteed enterprises,arrears, and the PPP discussed above).

They also make the point about the program being off target in other areas.

At the beginning of the program, the IMF and the European Commission estimated that nominal GDP would be €174 billion in 2013 or over 5% higher than where it actually will be (Euro 165 billion).

They also quote an economics paper from Ricardo Reis which puts a chilling perspective on what has taken place.

Between 2000 and 2012, the Portuguese economy grew less than the United States during the Great Depression and less than Japan during its lost decade.

If we look forwards something of a brake has been applied by demographics.

Portugal has the lowest fertility rate in the Euro Area

Its population has shrank 1.3% in the past three years

Actually they are somewhat unfair in their view of 2013 as a new diesel engine plant is economic growth but the underlying issues remains the same. Perhaps at this point their short position in Portuguese govenrment bonds -the reason for them releasing this!- started to outweigh objectivity.

Also a subject discussed on here got an airing which is the national debt to tax revenue ratio.

Portuguese sovereign debt amounts to 3x the sovereign’s revenue

The ratio of Debt/Revenue has doubled in the past 10 years

Another disconnect?

The Portuguese government bond market has been on quite a surge which has continued in 2014 where so far peripheral Euro area bonds have risen strongly. Currently the ten-year benchmark yields 5.39%% as opposed to the 17% of the peaks back in early 2012. If Tortus Capital put on their short a little while ago they will be getting not a little hot under the collar! But I have discussed before the apparent disconnect between financial markets and real economies in this era of so much central planning and this current situation does not fit the analysis above.

This was reinforced by yesterday’s news that Portugal had sold 3.25 billion Euros of a new five year bond which apparently had 11.2 billion Euros of bidders. The official view is that this demonstrates faith in Portugal’s economic program and it is of course true that 3.25 bilion has been raised which is no little sum in an economy the size of Portugal’s. However there is a catch and it comes from the interest-rate which was 4.66%. This sounds good but compares to this which are the interest-rates at which Portugal has been borrowing. from my article of the 27th of November. From a speech by the head of the ESM Klaus Regling.

Our lending rates are half the rate of the IMF and they are the same for Ireland, Greece and Portugal, 1,5%, while the IMF charges more than 3%.

Is paying more a success then? This becomes a bigger issue as we look at the extra debt which Portugal will have to finance.

What about economic growth?

2013 saw the beginnings of an improved pattern for economic growth in Portugal. The quarterly increases were not enough to stop the year on year economic growth rate from falling but if they are sustained it soon will. Below is the glass half full view of the situation.

Industrial Production year-on-year change rate was 2.9% in November, down by 0.4 percentage points from rate observed in the previous month. Manufacturing Industry year-on-year change rate was 4.6% (2.7% in October).

In year-on-year terms, in November 2013, exports of goods increased by 7.2% and imports of goods by 3.2% (in October 2013 those figures were +4.5% and +3.9%, respectively).

Retail trade turnover index registered a year-on-year change rate of 3.6% in November 2013 (0.4% in October).

Although some perspective to the retail trade figures was provided by this addendum to them which starts the glass half empty section.

Employment, the number of hours worked and wages and salaries presented year-on-year change rates of -1.9%, -3.6% and -5.1% in November (-2.7%, -3.0% and -4.2% in the previous month) respectively.

Today’s data has added to this.

The index of production in construction decreased by 14.8% in the quarter ending in November 2013, in year-on-year terms

The services turnover index, adjusted for calendar and seasonal effects, decreased 2.8% in November, in year-on-year terms (change rate of -3.7% in September). The employment, salaries and number of hours worked indexes presented year-on-year change rates of -2.4%, -1.6% and -2.1%, respectively (-2.5% and -1.4% and 0,0% in October, by the same order).

I have given fuller details here because the services sector is the largest part of what we consider to be a modern economy.

What do you mean by another default for Portugal?

A stealth default has in fact takem place twice. It is a stealth default because those who finance the European Union (via the EFSM), and the Euro (EFSF)  were never even consulted. Tortus Capital put it thus.

In July 2011, the EFSF and EFSM postponed their loan maturities to Portugal by five years from 7.5 years to 12.5 years. In June 2013, the maturities were pushed an additional seven years from 12.5 years to 19.5 years


There is currently a lot of news splashing around in the media about Portugal. We move from the bond sale of yesterday to Tortus Capital talking its position/book and a review from the ratings agency Moodys is also due. However to my mind the real question is whether its economic prospects have changed enough to make its debt burden begin to look affordable. Here the view of Tortus Capital that a GDP growth rate of 3.5% per annum tends to echo as even in the good year’s Portugal only averaged 1%.

Yes there have been some improvements as I have described above but we also know that 2014 requires yet more austerity from Portugal. This will reduce any economic impetus that has been generated and the burden will continue to build. Europe has spent extraordinary sums here as in addition to the bailout Portugal has received some 21.4 billion Euros of cohesion funds in the period 2007/13 and the European Investment Bank has in total lent it 23 billion Euros. So the only way of avoiding a default is for Europe to pour money into Portugal at an even faster rate along the lines of this from the novel Dune.

The spice must flow

Sooner or later the spice will not flow fast enough……

Of UK Construction production and business surveys

There was quite an issue with today’s official data which I summarised thus on twitter.

The disconnect between surveys and data reached a peak with UK construction in November where a #PMI of 62.6 went with -4% growth!

If this was the Starship Enterprise it apparently has on the one hand been doing warp factor nine and on the other has moved into reverse! Aren’t you glad that’s clear?

Some end of week humour

From @grodeau

-20C in Hell, Michigan

Bankia sells €1 bn bond


16 thoughts on “Is Portugal's debt burden unsustainable without another default?”

  1. Pavlaki says:

    It does worry me that Portugal is bending the rules on reporting economic figures. I am afraid that other peripheral countries are doing the same thing with the ECB turning a blind eye? The ECB have been willing to undertake measures that are in effect a default position without declaring as such and in my mind are complicit. Once again the need to keep the Euro project ‘on track’ overrides honest reporting. I guess the hope is that they can push things far enough into the future that economic recovery will cover up their duplicity.

    1. Anonymous says:

      They bent them to get the PIGS in! There are two sets of rules, one you tell the hoi polloi and another for the real world. Now they are having to pile lie upon lie. It’s infectious because economists then use these figures to argue against the current scenario as we lose track of where lies end and truth begins, largely because all economic stats are relative.

      1. forbin says:

        in war truth is the first casualty , apparently its also the first casualty in politically motivated unions….



        1. Anonymous says:

          I really do believe the establishment sees this debt as so systemic they are on an unofficial war footing where “anything goes” that helps to save the center from change.

    2. Anonymous says:

      Hi Pavlaki

      There was also the issue of the Portuguese swaps transactions which seems to have been swept under the carpet.

      But of course it is not only the peripheral Euro nations who have made such moves as for example the UK was second on the OECD list of nations with PPP exposure (around 8% of GDP).

      The problem with the kicking of that poor battered can into the future was that things got worse rather than better and the original bailout is nearly done.

      1. Pavlaki says:

        Thanks Shaun – I had missed that one! It does concern me that the first reaction of the peripheral governments appear to be to wonder how they can hide the true situation. I wonder to what extent this has gone on in Spain?

  2. forbin says:

    Hello Shaun,

    Just like Greece and Spain I think that being on “t’rack” means they are on track to stay in the Euro and not leave .

    The political union of the EU for which the Euro is the flagship must not be derailed by anything like reason or economic sense !

    Eventually there will be a crisis , possibly when the Spanish debt is fully seen or Italy just declines too far but I feel the can can be kicked for a lot longer that my bag of popcorn will last !


    1. Justathought says:

      Hi Forbin,

      You are so right, keeping in mind the last 2 weeks have seen a 35% collapse in the cost to ship bulk…
      It is speading up…

      1. forbin says:

        uh oh , the Baltic Dry index……

        We know what happened last time that went south …


        1. Anonymous says:

          Hi Guys

          The move in the Baltic Dry Index really picked up yesterday as it dropped 11.3% to 1512. As it had been 2277 on Xmas Eve there has been quite a drop overall as Justathought says.

          The HARPEX index (container freight) has fallen but much more gently from 406 in late summer 2013 to 392 as of the last print. It is updated less frequently and the last was the 4th of Jan so we await to see its next move!

  3. Anonymous says:

    Just started reading this:

    Kindle edtion: 0.59p. Islam and Mason are the only mainstream UK journos who even tried to comprehend the financial crisis. It’s got a lot of info on the EU which is why I’m posting it here. Remember even if you don’t have a kindle you can download the kindle app and read it on that!

    First chapter has Euros flown into Greece on military planes. Plus he mentions housing several times in the preface. Bodes well.

    Regarding PMI – why is such stock put in a survey that asks a subset of company purchase managers if they are feeling positive or not. How can we expect this to predict accurately? IMHO many purchase managers got caught up in wishful thinking on viewing the same propaganda we all see in the papers about a “recovery”, failing to understand that Cameron is mates with the newspaper proprietors whose first motivation is not to spread truths.

    Shaun – what % of companies participate in the PMI survey? How many respond? I tried to find this out before but failed :-(

    1. Anonymous says:

      Hi Progrock

      For the UK service sector for example I thought that the number surveyed was definitely in the thousands. But I have been looking for something to back this up and all I can find is this.

      “Each country PMI survey for the manufacturing or
      service sector is based on questionnaire responses
      from panels of senior executives (or similar) in
      over 400 companies. The survey panel is carefully
      recruited to accurately represent the true structure
      of that sector.”

      I will ask around…

      1. Anonymous says:

        Hi Shaun, great, thanks. Isn’t it just amazing that a survey that is trotted out as a near-gospel confirmation of what *will* happen has opaque information on how it’s compiled.

        Though to be fair it does track GDP *reasonably* well:

        Still would be great to know…

  4. Rods says:

    Hi Shaun,

    Another interesting blog.

    Human perception and reality are very different bedfellows and I would have thought there must be a perception and feel good factor in the PMI figures, which will tend to make them a bit better on recovery and a bit worse when times are bad.

    The IMF have a plan for removing up to 16% of Portugal’s sovereign debt as this is the percentage of savings to GDP and they seem to be pushing the peoples participation in a ‘one off’ (until the next time) savings tax idea very hard at the moment.

    Where Germany has won the argument on the banking union (worth a blog by you in it’s own right), if a country wants to bail out a bank it can do so but must use its own funds otherwise it is bailed by the bondholders, savers with over €100,000 deposited and shareholders along, if necessary, with the liquidation of the bank. We were told Cyprus was a unique-one-off, but it is the model for all future Eurozone bank bailouts. When this is needed it is going to be interesting as the article I read said that the tripartite of: National authorities, the EU banking union committee and the EU Commission will have joint control over the situation and this will require around 140 separate votes by the various interested parties, all of course overnight or over a weekend, if it is to handled in a timely manner! They aim to have a €50bn bailout fund by 2024-2026, but I suspect this will be much too little, too late! Is this another unstable lifeboat in the making? Will deposit insurance with customers expecting higher returns to cover this and inflation become the norm?

    Where we may well be heading for the end of the economic cycle in the latter part of 2014 and through 2015 where it started in 2009 and they run on average for 78 months, this is not going to bode well for countries like Portugal, Greece, Spain, France and Italy who have had marginal or no growth during the current one. I suspect there is much more pain ahead for the weak Euro member states and the EU banking union committee will be busy. Is this the period when the land, property, and equity along with many other bubbles begin to pop? Personally I think, with the current developed nations sovereign debt millstones around many countries necks, we are going to have a repeat of the 1950’s when one third of sovereign nations defaulted, Japan is a prime candidate to lead the pack. The rest which will be the less indebted stronger nations will use high 1970’s style inflation to bring their sovereign debts under control! Will the next crash and crisis be bigger than the last one probably, where economies are generally in much weaker position now than in 2007.

    Time the “I promise to pay…” guarantee was changed on many currency notes I think, to something along the lines “I promise to pay a fraction or less….”.

    1. Anonymous says:

      Hi Rods

      I cannot see the IMF plan working as there are two major flaws.

      Firstly a 16% haircut or default is nowhere near enough. I was wondering if the 30% suggested by Tortus Capital was enough as I read their document.

      Secondly I think that it is intellectually flawed to always punish savers and reward debtors. It is invariably convenient and may suit in the short-term but over time you need a balance between savers and debtors not a one way street. The pain should be shared in my view.

      I agree that we need to fear the end of this “recovery” phase as any down turn will be from a very weak existing position.

  5. MajorFrustration says:

    Whilst visiting East Surrey hospital last week I arrived at the same time as a taxi carrying five nurses from Portugal who were starting a three year contract.

Leave a Reply

Your email address will not be published. Required fields are marked *