Portugal debt efforts may be warning for Greece

LISBON - As debt-plagued Greece struggles to meet Europe’s strict terms for receiving its next round of bailout money, the lesson of Portugal might bear watching.

Unlike Greece, Portugal is a debtor nation that has done everything that the European Union and the International Monetary Fund have asked it to, in exchange for the $103 billion bailout Lisbon received in May.

And yet, by the broadest measure of a country’s ability to repay its debts, Portugal is going deeper into the hole.


The ratio of Portugal’s debt to its overall economy, or gross domestic product, was 107 percent when it received the bailout. But the ratio has grown since then and by next year is expected to reach 118 percent.

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That’s not necessarily because Portugal’s overall debt is growing, but because its economy is shrinking.

Without growth, reducing debt levels becomes nearly impossible. It is akin to trying to pay down a large credit card balance after taking a pay cut. You can slash expenses, but with lower earnings it is hard to set aside money to pay off debt.

Vitor Gaspar, the Portuguese finance minister who came to power as part of a new government last summer, is highly regarded by European economic and finance officials. He has reduced the government’s budget deficit by more than one-third, through tough measures that include cuts in spending and wages, pension rollbacks, and tax increases.

But many economists say those moves are also a reason Portugal’s economy shrank by 1.5 percent in 2011 and is expected to contract by 3 percent this year.


“Portugal’s debt is just not sustainable,’’ said David Bencek, an analyst at the Kiel Institute for the World Economy, a research organization in Germany. “The real economy does not have the structure to grow in the future and thus will not be able to pay back its debt in the long run.’’

The public in Portugal has generally gone along with the government’s policies without the violent demonstrations that have rocked Greece, but it is starting to lose patience.

On Saturday, more than 100,000 people assembled peacefully in Lisbon’s sprawling Palace Square to rally against the austerity measures and the nation’s 13 percent unemployment, while chanting, “IMF doesn’t call the shots here!’’ The head of Portugal’s largest labor union vowed to hold additional protest rallies.

The IMF predicts that Portugal will grow enough to reduce its debt to a manageable level. But even the IMF warns in its recent economic review that if growth were to disappoint, Portugal’s debt “would not be sustainable.’’

Gaspar, an economist who is a former research director at the European Central Bank and a disciple of the bank’s austerity-focused philosophy, insists that his country’s debt is manageable. And he has no plans to ease up on austerity. This year he intends to slash government pension payments by close to $1.6 billion, and cut the bonus payouts that public sector workers in this country have long earned.


In discussing his record, Gaspar prefers to focus on the effect his efforts have had on Portugal’s budget deficit - the difference between what it spends and what it takes in - which has fallen to 5.6 percent last year, from 9.1 percent in 2010. For this year, Gaspar forecasts a decline to 4.5 percent.

“We have delivered, and our adjustment program stands out in the euro area,’’ he said during an interview Friday in the ornate surroundings of the finance ministry here.

Once Portugal’s budget reforms take hold, Gaspar predicts, the country’s economy will grow by more than 2 percent from 2014 on, and the debt will fall accordingly.

Gaspar has won plaudits from Europe’s leadership and the IMF, which are eager to champion an exemplar of economic revamping in contrast to Greece’s unspooling disaster.

In fact, Portugal is deemed such a model of reform that the Europe Union and IMF are widely expected to come up with more money for Portugal next year if necessary - as was suggested in an overheard exchange between Gaspar and Germany’s finance minister at a meeting last week in Brussels.

But as Portugal’s slowly rising debt-to-GDP ratio indicates, being Europe’s model debt patient does not necessarily make it easier to get out of debt.

If Portugal and other European debtors find it increasingly difficult to pay off their creditors because of slow or no growth, some experts predict they, too, might eventually need to negotiate debt write-downs.

That was how things played out in Latin America in the 1980s, once it became clear that the IMF’s relentless austerity push was impeding the growth that countries needed to pay down debt.

Charles Wyplosz, an international economist, argues that until economic activity resumes in debt-burdened countries like Greece, Portugal, and Italy, it is pointless to punish citizens with growth-sapping policies.

“It’s all pseudo-science,’’ he said. “That is why I think Portugal will have to default on its debt, and you can argue that Italy will have to restructure as well.’’

According to the calculation of Bencek, Portugal would need to produce a primary surplus of about 10 percent of GDP in the coming years to reduce its debt ratio to a permanently serviceable level.

That, he said, would require a degree of cuts in spending far beyond what Gaspar and his team have already been able to achieve.

As even the current cuts bite ever deeper, many Portuguese are asking if it might not be better for their government to trying negotiate easier terms with its lenders.