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Troika says Portugal in second bailout risk

by CHRIS GRAEME [email protected]

The International Monetary Fund-led ‘Troika’ has warned that Portugal may need a second bailout if the recession gets worse.

The stark message was made at the end of last week after the publication of European Commission forecasts suggested that the economy would contract by 3.3% this year.

After Greece, Portugal is the Eurozone country with the worst economic perspectives and the worsening of the recession could make it impossible for her to meet her debts and stick to stiff austerity measures.

Analysts also say that unemployment, currently at 14%, could shoot up even higher.

Economist and former finance minister, António Bagão Felix, believes that the economy could begin to turn around in the fourth quarter of the year, but doubts austerity measures in their present form are the answer for growth.

And ISEG university professor Paulo Trigo Pereira told Público newspaper that the country’s GDP would contract even more – by 3.5 to 3.8%.

“The idea that this year will be a moderate recession and next year the economy will grow is out of the question. The recession will get worse this year, and if next year we end up with zero growth, that will already be an improvement,” he said.

Analysts say that things haven’t been so bad since the early 1980s and that since 2000, the year that Portugal entered the single currency, unemployment has consistently risen from 3.7% to 14%.

In the run-up to joining the single currency, the Escudo suddenly had a greater value that it was actually worth – the so-called ‘hard Escudo’ – when it was believed that greater parity would force unproductive and uncompetitive Portuguese companies to modernise their manufacturing and business processes along international standards, with a view to increasing exports.

However, the exchange policy never translated that effect into reality. In other words a euro in Portugal was not worth the same as a euro in Germany in how this value was reflected in wages and the costs of goods and services.

In fact the Portuguese economy suffered as a result of business investment flight to cheaper Eastern European and Asian markets.

Instead the economy turned towards non-competitive and non-wealth generating sectors of the economy like public works and construction and became an importer rather than an exporter.

Paulo Trigo Pereira warns that the impact of successive austerity measures, coupled with a deep economic recession, will have “serious consequences” on public accounts and on taxes.

“The deficit will be higher than foreseen, and to attain its goals the Government will be forced to fall back on extraordinary receipts, and may not be able to return to the international money markets in 2013,” he warned, adding that it is very likely Portugal would need a second bailout, albeit a smaller one, sooner or later.

The Government and its prime minister, Pedro Passos Coelho, has consistently reiterated that Portugal will not need a further bailout or an extension on the period needed to maintain its austerity measures in place and pay back its loans.

International institutions too, like the European Central Bank are remaining positive about Portugal and its performance.

ECB president, Mario Draghi, said he believed Portugal would not need a second bailout. “We believe that Portugal is on the right path.”  

Economist José Reis sees the forecasts getting bleaker, and adds that the austerity measures will not work because they will kill any chance of economic recovery by worsening the recession.

“I don’t see any measures that have any logic in terms of growth on the horizon. A fall in receipts and rise in unemployment are inevitable,” he said.

Bagão Félix agrees: “I can’t see the light at the end of the tunnel; Europe seems stuck in a straight-jacket that it can’t get out of. Austerity is all very well, but it has to be intelligent austerity.”