Portugal’s Financial Situation Summarized In One Graph

Tyler Durden's picture

Submitted by Erico Matias Tavares of Sinclair & Co.

Portugal’s Financial Situation Summarized in One Graph

Portuguese bond yields reached historical lows this week – unimaginable only a few short months ago. Surely this must be a vindication of the prevailing orthodox policies of reducing government expenditures and raising taxes as part of the government’s austerity program in order to secure external funding. Right?

As proponents of a comprehensive and, as much as possible, orderly debt restructuring program for the weakest Eurozone economies, we beg to differ. The following graph seldom makes the news, but in our view is critical to understand what has been happening in the Portuguese economy in recent years and gauge the sustainability of the current situation.

Indebtedness Ratios as % of GDP: Dec-09 to Present

Source: Bank of Portugal, INE.

Let’s see what is going on here. The level of indebtedness as % of GDP has steadily increased since the end of the great financial crisis in 2009. If debt was ever a cause for the bust, we now have much more of it. But the driver of that increase is what concerns us, as a euro spent by the government typically has a very different economic outcome of a euro invested by a company.

Small and medium enterprises (SMEs) are the engine of economic growth in a modern developed economy. If these are doing well, the economy is doing well. But in Portugal SMEs have been caught between the country’s need to delever and securing funds to remain in business. As a result, their indebtedness as % of GDP has flatlined since 2009, meaning a reduction in absolute terms given the decline in nominal GDP. In other words, society’s wealth generators have steadily shrunk in recent years.

What accounts for this? A combination of credit becoming more selective – which more or less continued to flow to large corporations during this period – bankruptcies, restructurings and fixing balance sheets as a result of the most severe recession in years. Managers of Portuguese SMEs are nothing short of heroes, having to make payroll in circumstances like these. Many have even managed to gain market share abroad.

But as deleveraging goes, it’s private individuals who took one for the team, with their indebtedness shrinking from 106% of GDP in 2009 to 95% now. Rising unemployment, a reduction in wages and government transfers, tax increases as well as an uncertain economic environment, all took their toll on the Portuguese consumer. The steep rise in emigration recently should also be noted, meaning that the local demand curve, tax and demographics bases, productivity and entrepreneurial spirit may all suffer as a consequence for many years to come.

This curtailment of liquidity growth in the private sector would have undoubtedly pushed the economy into a deep depression. But the Portuguese government intervened and put its balance sheet on the line, with the support of the now departed (in agreement, not in practice) “Troyka” – the IMF, the ECB and the EU.

Whatever the private sector delevered the government soaked up and borrowed some more. The indebtedness of the non-financial public sector jumped from 108% in 2009 to 166% now. This is a staggering increase in just over four years, and clearly challenges the belief that the already painful austerity measures substantially shrunk government largesse – perhaps in absolute terms, but certainly not in relative terms. However, under the prevailing economic thinking there was no other choice to preserve the status quo.

Therefore, the graph shows that the true wealth generators of the economy continue to struggle, and now face the prospect of having to pay for the snowballing government debts in the not so distant future. With limited access to funds and rising taxes and costs (with the notable exception of labor, which has its own circular implications), how can they generate enough growth to restore the country’s finances? Bond yields better stay at historical lows indeed.

Looking back at history, low bond yields and burgeoning external financing is not what follows after a relatively small, little diversified and highly indebted country goes bust without any significant debt restructuring.

Is the current situation in Portugal the result of a successful economic policy, or are we merely setting the stage for bigger financial problems in the future? Sacrifice is hard, and it must have a reason.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Devotional's picture

in Portugal, our minister of the Economy talks of "an economic miracle" that is taking place. Listen, all is well according to government. We have a constitution that does NOT allow government workers to be fired. Let that sink in - one CANNOT fire a government worker. 

Tao 4 the Show's picture

Is that the geographical area formerly known as Portugal? Nations are so passé.

Devotional's picture

indeed you are correct :) sovereignty has been lost yes but the constitution does not alllow for the firing of government workers.

EUSSR baby!

nink's picture

I wonder if the government is hiring, Where can we send our resumes? The good news is we can't get fired when we work for the government either where we will all end up with EBT cards  



kowalli's picture

bad news that they can bury you in their back yard xD

headhunt's picture

Is that graph of Portugal or the USSA?

Devotional's picture

at least we have guaranteed growth via whores,pimps, illegal drug trade and contraband. 

border dog's picture

Is this more about the "barking dog" ?

smacker's picture

So, wealth producing SMEs are flatlining and the private sector is deleveraging. The government sees an opportunity to borrow & spend some more. Socialism at work.

ebworthen's picture

444.5% Indebtedness to GDP ratio?

So I make $100/day but owe $444.5/day?

Sounds like someone was engaging with loan sharks.

Captain Willard's picture

I love your comments EB. But don't get "stock" and "flow" confused from now on :)

Jano's picture

GS has done such magic in Greece with Euro readiness.

crazybob369's picture

How sad what has become of a once great country.  Kind of reminds me of another more recent great country.  All empires come to an end, and the end can be ugly indeed.

Calculus99's picture

See, the debt, it never goes away.

Sure, you can hide from it for a bit, you can try to forget about it, but it never goes away and the lenders have a habit of not forgetting about such matters.

Reminds me of that classic bumper sticker -

Think nobody cares - just miss a repayment or two...

novictim's picture

Dear ZH, can you see what is really going on here?  This is all to do with the ever growing wealth inequality.

The oligarchs in the USA and Europe and the World want to have their cake and eat it too. And of course that does not work.

You cannot starve the worker-consumer of a middle-class wage and then expect a thriving economy.  

All the debt represents is the borrowing employed in order to maintain the fiction of shared wealth and prosperity.

Guess what?  You cannot borrow what does not exist...ergo, the borrowed money represents the wages and wealth-sharing that should have been implemented and payed out all along.

When are we going to face this truth?  

Sirius Wonderblast's picture

So what happens when base rates go up, and the hot money sniffs out better yields elsewhere than Eurozone junk bonds? Because at the moment here in UK, our GS sponsored lightning rods, having funded a boom in house prices (to simulate economic recovery) having been successful are now indicating rates must go up to stifle it. BTW, this is a fresh form of genius with which I am unfamiliar.