Portugal is the next global problem claims New York Times

By CHRIS GRAEME [email protected]

Portugal is on the verge of bankruptcy, according to a lead economy article published in the New York Times (NYT) last week.

The article states that Portugal has largely missed the spotlight because of Greece’s problems.

“But both are on the verge of bankruptcy and they look far riskier than Argentina did back in 2001 when it succumbed to default,” states the NYT.

The article says that Portugal spent too much over the last several years, building its debt up to 78 per cent of GDP by the end of 2009 (compared with Greece’s 114 per cent of GDP and Argentina’s 62 per cent of GDP at default.)

That debt has been largely financed by foreign lending and like Greece, Portugal has not been paying interest outright but instead refinances its interest payments each year by issuing Government Bonds.

An analogy would be someone not paying enough off their monthly credit card bill and all of the interest and then having to go and persuade a consolidation company to take on the debt but at an even higher rate of interest.

By 2012 Portugal’s debt-GDP ratio could reach 108 per cent of GDP – in other words Portugal is spending more on servicing debts and borrowing then she is receiving from all income receipts.

The NYT says that the time will come when the international financial markets will simply refuse to finance this “Ponzi game”.

The key issue that Portugal is facing is that, like Greece, Ireland and Spain, she is stuck with a highly overvalued exchange rate because she is in the Euro; when it is in need of far-reaching fiscal adjustment.

Cost cutting

To keep its Government debt bonds constant and pay annual interest on them at five per cent, Portugal would need to be enjoying a primary surplus growth rate of 5.4 per cent of GDP by 2012.

And with a budget deficit of 5.2 per cent this year Portugal needs to slash 10 per cent off costs all round – that means cutting public sector wages, benefits and all government costs by this amount. That would be nearly impossible to do without creating massive social problems and risking demonstrations.

Squeezing the public tighter would also mean that Portugal’s fragile economic recovery would be wrecked as unemployment rose and consumers had less surplus money to spend in the economy.

So far the PS Socialist Government of José Sócrates has not been prepared to make the necessary cuts which former PSD leader and economist Manuela Ferreira Leite, suggested would have to be at least five per cent all round.

In Portugal’s 2010 budget, the Finance Minister, Fernando Teixeira dos Santos has planned for a budget deficit of 8.3 per cent of GDP, not far off from the 2009 budget deficit (9.4 per cent).

The NYT says that unless Portugal really goes for painful cuts the situation will get worse and then Portugal will demand a bailout package too.

But the Germans and French will eventually pull the plug on bailouts and smaller countries, like Portugal, may even have to leave the Euro.