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
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
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
-20C in Hell, Michigan
Bankia sells €1 bn bond