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Spanish banking crisis threatens Portugal’s economy

By ANA TAVARES [email protected]

Spain’s worsening recession is already having a negative impact on the Portuguese economy, but longer term consequences may be even more dramatic.

If remaining eurozone economies continue to slow and if our neighbouring country, which requested a €100 billion bailout for its banking system last Saturday, doesn’t recover soon, Portugal’s economy will be in serious trouble.

With the Spanish market buying over a quarter of what is produced in Portugal, it is no surprise that the national economy is so dependent on Spain.

This reliance is only slightly minimised by the fact that not all of what is sold is consumed by the Spanish market – some of the exports are also distributed to other countries.

Between January and March, exports to Spain dropped 4.1% to 26% of the country’s total exports, representing a loss of €110 million.

However, it is not just the Portuguese economy that is affected: the Spanish market is also suffering from Portugal’s recession as national imports from Spain have fallen 4.4% (less €206 million).

According to Cristina Casalinho, head economist at the BPI bank, there are no significant risks of financial contagion despite the country’s strong economic reliance on Spain, as “Spanish banks operating in Portugal are quite solid”.

She told Portuguese daily newspaper Público that although the Spanish recession is worsening, Portugal’s debt interest rates are in fact decreasing.

But since the country’s economy is largely fuelled by exports, the economic slowdown in other European markets should set alarm bells ringing for Portugal: exports to Germany have dropped 1.7% in April from the previous month, and whilst exports in general have grown 11.6% in the first quarter of the year, in March they dropped 8.3% according to numbers released by the National Statistics Institute (Instituto Nacional de Estatística).

The main reason behind the slowdown is a decrease in demand by European Union countries, with Portuguese exports to the EU increasing just 2.5% in March.

But not all markets are slowing down to single digit figures. Portuguese trade outside the EU, namely to Angola, has been making up for the decrease in demand across Europe and showed a growth of 26.4%.

However, compared to previous months, where exports had increased by 34%, it appears even trade outside the EU is under-performing.