Don't Shoot the Messenger

Portugal Gradually Shuffles Its Way Towards the Front of the Debt Queue

Well, a weekend during which Greece seems to have been finally able to pass muster on its bond deal, while Mario Draghi has given the official “all clear” on the debt crisis, seems to be as good a moment as any to have a look at the country which many investors consider likely to be the next to enter the restructuring proces.

Speaking after last week’s meeting of the  ECB’s governing council Mr Draghi said  the recent three-year long-term refinancing operation (LTROs) had been an “unquestionable success” and had “removed tail risk from the environment.” For the uninitiated “tail riskis defined by Wikipedia as “the risk of an asset or portfolio of assets moving more than 3 standard deviations from its current price in a probability density function. Such risk is often under-estimated using normal statistical methods for calculating the probability of changes in the price of financial assets”.

Now I’m not exactly sure whether a two percentage point shift in bond yields over a 12% starting point – or a movement of about 16% in two weeks – counts as tail risk in the technical sense, but it sure looks like it should, and this is  basically what just happened to Portugal.

Portuguese bond yields are rising as investors are busy putting cheap money from the European Central Bank to work elsewhere. The increase in 10-year borrowing costs by almost two percentage points in the past two weeks is stoking concern among investors that the nation will struggle to resume bond sales in 2013. Portugal has been unable to sell debt due in more than a year since it was given a 78 billion-euro ($102.8 billion) bailout in May 2011, following Greece and Ireland……Portugal’s 10-year yield was at 13.83 percent at 12:07 p.m. in London, up from 7.48 percent a year ago. The extra yield investors demand to own the nation’s bonds rather than Germany’s widened 1.1 percentage points to 12.04 percentage points since the ECB announced its program of three-year loans to banks on Dec. 8. Italy’s spread shrank 124 basis points to 3.2 percentage point, and Spain’s narrowed 53 basis points to 3.26.

So why would people think that Portugal might be the next to need a second bailout? Well, what the Greek historian Thucydides would have called the efficient cause would be the fact that it has a 9.3 billion euro bond redemption due in September next year  and the despite initial Troika hopes, the markets remain closed tighter than the lips of Angela Merkel were to the supposedly amorous advances of Silvio Berlusconi.

But the final (or underlying) cause which will send Portugal into a second bailout is the fact that the country has a high level of debt (both public and private) and a chronic growth problem which won’t simply be turned around by a bit of good will and a few “magic wand” structural reforms. So essentially the numbers just don’t add up.

So Just What Are The Numbers?

“Our baseline expectation remains that Portugal will be able to access markets late next year,” Abebe Aemro Selassie, who is taking over supervision of the IMF portion of the international bailout plan for Portugal, said yesterday in an interview with Bloomberg television. “This will not be easy.”

With interest rates on 10 year bonds up around 14% it certainly won’t be. According to the Troika calculations Portugal had sovereign debt of 102.7% of GDP in 2011, and a budget deficit of 5.9% broadly in line with the target laid down in its bailout package. Yet, despite the fact that the Portuguese reform programme was recently described by the WSJ (following the lead of the IMF) as being on track, the deficit numbers were, in fact, only saved by a last minute scramble which involved transferring funds (5.6 billion Euros or 1.9% of GDP) from the banking-sector pension system to the government social security one, in order to achieve what the IMF consider a short term accounting benefit. There were also questions raised as to whether this was not “short term gain for long term pain” in another sense, since the government has also to assume future liabilities for bank pensions, and several experts have queried whether these liabilities were transferred on a “fair value” basis, or whether indeed some sort of disguised longer term (in the short term the bank balance sheets take a hit) subsidy to the banking system was not in fact indirectly provided.

In their second review of the programme (published in December) the IMF said the following: “Staff questions both the timing of the transfer and the appropriateness of in effect using an accounting technique to mask the true fiscal position”.  That is to say the Fund has a double role here – to talk the efforts of the Portuguese administration up before the world’s press, and to try and keep the politicians in line in the background.

So achieving last years target was not easy (see above chart which comes from an excellent research report from Citi analyst Jürgen Michels and his team), with the day only being saved by a one-off transfer, a technicality which means that this years deficit reduction will effectively be from a real base of 7.8% of GDP (5.9% + 1.9%) to 4.5%  (or 3.3 percentage points), which is significantly  larger than the 2011 reduction which was really from 9.1% in 2010 to only 7.8% (or 1.3 percentage points – i.e. the fiscal “effort” in 2012 will be two and a half times as big as the 2011 one).

Without the accounting “fudge” revenue, it would have come in significantly under target, and this highlights one of the big problems in all the deficit reduction programmes that are currently in place on Europe’s periphery, namely that the economic contraction associated with austerity programmes (in uncompetitive economies) produces a severe fall in revenue, one which is not necessarily associated in linear fashion with the output fall itself. For example, a 10% fall in retail sales demand may produce a much more dramatic fall in profits, which means that tax income from profits can be almost wiped out. This is one of the problems the Greeks have been constantly up against, and was surely partly behind last years big Spanish budget target “miss”, and while many stress that programme implementation issues are fewer and farther between in Portugal than in Greece they are hardly negligible looking at the country’s track record, so the administration will be permanently struggling to meet 2102 revenue targets.

Non-evident Non-negligible Liabilities

As well as revenue shortfalls, government expenditure also overshot, largely due to greater than planned capital expenditure. The reasons for the non-compliance with expectations on the capital spending side are interesting, since they mainly derive from the needs of Portugal’s state-owned companies (SOEs) and transfers made to Public Private Partnerships (PPPs), which surely form an important part of the programme slippage risk.

Anyone who has recently read my recent post on the true level of Spanish debt should not be the least surprised to find that similar issues exist in Portugal (for explanations of methodology see the Spanish post). As in the Spanish case the government  provided guarantees for SOEs, so it has contingent liabilities and might be forced at some point to take over the debt. According to IMF estimates, explicit guarantees to Portuguese SOEs  (including those outside general government accounts) represented anywhere between 10%  and 15% of GDP in mid-2011.

Then there are the PPPs. These are especially important in Portugal, and the value of the government’s ultimate exposure may be something like 14% of GDP. Such partnerships have been popular politically since they have the accounting advantage for governments that, as the private sector holds the debt and the state simply services it, the outstanding quantity doesn’t count as state debt for Eurostat EDP purposes. Indeed such schemes have even been marketed to government agencies on just these grounds, as I pointed out in an early post on the topic – Just What Is The Real Level Of Government Debt In Europe? (February 2010). PPPs are often used to finance infrastructure programmes, with the government paying a charge to use the infrastructure until final ownership is assumed at the end of a defined period. In the Portuguese case such “rents” amount to about 1% of GDP annually.

Then, naturally, there are the accumulated unpaid bills. According to Eurostat data Portugal had 8.8 billion Euros worth at the end of September last year, or around 5% of GDP, although note that some of this will be normal trade credit, so the Portuguese government’s own estimate of 3.5% of GDP which should be counted as debt may not be that far from the mark.

Also, banks need recapitalising, and the IMF estimate that the banking system will need funding to the tune of about 4.7% of GDP in 2012 alone.

Growth Beyond The Bounds Of Avarice

So the 2012 deficit objective is challenging, and the risks to the debt path are not negligible, but the main issue determining where Portugal goes from here is not whether or not the country will be able to go back to the markets at the end of next year, but whether or not the country’s economy is able to make the growth leap assumed in the IMF debt forecasts.

According to the latest set of projections, the IMF anticipate a GDP contraction of 3% in 2012, to be followed by a return to growth at a rate of 0.7% in 2013. Crucially though, the Fund anticipates a growth rate of 2% or more on a more or less constant basis from 2014 onwards. This assumption is based on the impact of the proposed structural reforms which are more or less similar in all the programme countries – namely reform of the public administration to reduce the size and cost of the public sector, product market reforms to improve competitiveness (in this case especially in the telecommunications sector), and labour market reforms.

Now I have no doubt at all that most of these reforms are badly needed, I just doubt they will have the kind of “growth surge” impact that is being widely assumed. The Portuguese long term GDP trend has been heading strongly downwards in a most notable way for a decade and a half now, and turning this around will involve a lot stronger force than seems to be being anticipated.  In addition, Portugal has an ageing workforce which will surely be a growth rate negative, and the current deep economic recession is leading to substantial human capital loss, as young people leave to find work and a better life elsewhere. In fact these kinds of negative feedback loops are simply not considered in the kinds of growth model the EU and the IMF use, but are very important in determining the future path of an economy, as I try to argue in the presentation (downloadable from this page) I recently gave in Riga (referring to the Latvian case).

It’s not that I think the growth rates being offered are too optimistic, I think they are based on a theoretical model which is by-and-large out of date.

The IMF themselves recognise that none of this is going to be easy, when they say:

“Restoring competitiveness will require improvements in productivity accompanied by an internal devaluation. As productivity gains will materialize only gradually, the program will continue to focus on measures to lower input costs, increase the competitiveness of domestic production, and allow for a reduction in non-tradable prices….. In particular, significant adjustment in wages is needed in the short run, before reforms enhance  productivity over time. In this regard, public sector wages cuts, extension of working hours,  and the decision to redesign the extension of collective wage agreements and not to grant  automatic extensions during 2012 are welcome.”.

Following a pattern previously established in Latvia, Hungary and Greece, public sector wages and pensions are being reduced – principally by means of a 2-year suspension of the extra two (summer and xmas)  monthly payments of both wages and pensions (the IMF estimate that this is equivalent to a 12-percent average cut), but while this reduces pressure on public finance, the mechanism via which this would produce an increase in competitiveness in  the tradeables/export sector is far from clear, to me at least. Perhaps it is worth noting at this point, that Hungary has  implemented most of the measures being proposed in Portugal without visible impact on the country’s growth rate.

The only measure which it seems to me would start to lower wage costs in the private sector (as opposed to the improved productivity path, which the fund itself admits will be slow) would come from a measure to decentralise wage agreements in the way the new Spanish law allows, and let wages in the private sector fall steadily. But this would of course be deflationary, and hence would have its own impact on debt sustainability. In fact IMF forecasts are based on CPI inflation of around 1.5% annually between 2013 and 2016, so they themselves are hardly expecting any serious deflation, or even the relatively mild kind which the country experienced in 2009 (-0.9%).

So it looks to me pretty much like the country is facing a long period of adjustment (possibly over a decade) just like its Spanish counterpart, and it is unrealistic to think it won’t need support throughout this period. Simply put, the difficulty of implementing a correction of the magnitude Portugal needs within the framework of a common currency has been greatly underappreciated by policymakers right from the outset.

In Recession Now

Portugal’s gross domestic product shrank 2.8% in the fourth quarter on an annual basis, and fell 1.3% from the third quarter, according to the latest data from the National Statistics Institute. For 2011 as a whole, the economy contracted 1.6%, as compared with a 1.4% growth in 2010. Last year, exports rose 7.4%.

Growth got worse as the year progressed, showing the country is being hit by the slowdown in other countries in Europe and elsewhere. With domestic demand falling, and government consumption being cut back the country is now largely dependent on exports for growth, but with the country’s largest export market being Spain, also undergoing its own austerity program, this growth is getting harder to come by.

The chart above, which only shows data up to the end of September, makes plain how exports had surged following the ending of the first European recession, offsetting the negative trend in household demand.

But the latest data show that while net trade was a positive element in fourth quarter GDP, this was largely the result of a very sharp fall in imports. Year on year exports were up 5.8%, while imports fell by a whopping 13.5%. We don’t have official data from the statistics office on quarter by quarter changes in exports, but the data we do have suggests they stagnated when compared to the third, following a pattern generally seen across Europe. Despite the almost total dependence of the economy on exports now for growth, the country still runs a goods trade deficit.

And while both this and the current account deficit have improved over the last year, the rate has been painfully slow, indeed the IMF is still forecasting a CA deficit all the way through to 2016 (and presumably beyond) with a 5% deficit in 2013 and still a 2.8% one in 2016. To put this in perspective, countries in Eastern Europe like Latvia and Hungary who have been through these corrections already now run current account surpluses, and they are still a long way from being out of the woods.

Naturally, the Eastern countries are not direct beneficiaries of the ECB liquidity LTRO programmes, but while these make it easier for banks to meet their wholesale money needs, and governments to sell T bills and other instruments to banks, there is little sign they are likely to do much to help domestic credit till the correction is well advanced, and that, as we have seen may need many years.

Sustainable Or Not Sustainable?
Now all of this is relatively important, since debt dynamics are (other things being equal) quite dependent on economic growth rates. Just how dependent can be seen from the chart below, prepared by Jürgen Michels and his team at Citi. As can be easily seen, it only needs a growth rate of one percentage point on average below the troika baseline scenario for debt to be sent uncontrollably upwards, and the more the average growth rate deviates downwards the more rapidly debt rises.

Now there are three factors which basically determine the debt trajectory – GDP growth, interest rates on the debt, and inflation. The second of these can be more-or-less determined by the rescue programme, but inflation is the catch 22, since if inflation falls to very low or negative levels this helps send debt up, while if it doesn’t the country can’t regain export competitiveness, and there doesn’t seem to be any easy way round this, which is why I can’t see the reason for policymakers being so adamant Portugal doesn’t need restructuring.

In fact this is the conclusion the Citi analysts have come to, since they are now arguing that Portugal will need a 50% PSI this year (you remember those, don’t you, from the recent Greece experience).

In earlier assessments of its debt position, we argued that Portugal would not be able to move on to a viable fiscal path without a haircut of 35% by the end of 2012 or in 2013. While we acknowledge that Portugal is in many aspects different from Greece, we now conclude that the size of the haircut will need to be higher, to the tune of 50%, most likely taking the form of a reduction in the debt held by the private sector.

If done in 2012, a 50% haircut in the nominal value of Portuguese government debt would help to cap the peak in the debt-to-GDP ratio at around 113% in 2015. Hence, in our scenario, Portugal will need around €70bn extra funding from the Troika (plus sweeteners for the PSI) in order to close the funding gap until the end of 2015.

The Citi team argue the restructuring is needed simply to keep Portugal free from the need to go back to the markets before 2015, but I would argue the case on the grounds of trying to recover debt sustainability. It is important to remember that Portuguese sovereign debt may well be lower than the Greek equivalent, but Portugal has a far higher level of private debt, and this is not sustainable and will need writing down through the banking system to some extent, and the banks will continue to need help from the sovereign in doing this. While Portugal’s private sector debt is near 200% of GDP, the Greek equivalent is only something like 120%.

Naturally, since Greece is only headed for 120% debt to GDP in 2020, but I think almost no one believes this level is sustainable, and it is only out of political correctness towards Mario Monti (whose countries debt nudged just above the 120% level in 2011) that anyone even vaguely genuflects in the direction of making believe it is.

So action will need to be taken, and realism does need to come back into policy making. Maybe it sounds good to say that Portugal’s programme is on track, but it only got back on track after 1.9% of GDP was paid over from the pension fund. Implementation risks may be less in Portugal than in Greece, but that isn’t saying much, and they are certainly considerably higher than “non negligible”. Also, and as I keep saying time and time again, the risk to this whole LTRO funded slow-debt-dialysis on the periphery is most certainly a political one – one of populations being “driven mad” by all the austerity and lack of hope (think Hungary).

Despite Prime Minister Pedro PassosCoelho’s assurances that Portugal won’t follow Spain in seeking to loosen its deficit bonds in 2012, only last week Antonio Seguro, leader of the Socialist Party that secured Portugal’s bailout program last May, told the Troika inspection team that the country needed more time to hit the fiscal goals set under the loan.

“We affirmed our conviction that it is desirable that Portugal gets at least another year to consolidate its public accounts,” he told journalists, citing the need to turn around an economy that is tipped to shrink 3 percent this year.

Obviously, these programmes do not win votes for the government implementing them, and one party can seek to gain advantage over the other in electoral arithmetic by opposing them – Spain’s socialist PSOE, for example, now oppose the new labour market reform introduced in that country, only weeks after coming out of office. And even the wage reductions are only seen as temporary, a way to reduce expenditure, and not as part of an internal devaluation process, in which context it is interesting to note that Romania’s President, President Traian Basescu, has just said that that country’s wage adjustment programme should be reversed, with salaries in the public sector being raised back to their pre-crisis level as of June 1, even though Finance Minister Bogdan Dragoi has just said he thinks the country has probably just re-entered recession.

Naturally, austerity isn’t popular, and evidently it doesn’t work as intended, but then this was already known before we started on this course, so it isn’t really a surprise. But what alternative do the Euro Area’s imprisoned periphery have, since if they leave the currency and default on their debts they will be in a real mess, and if they stay they are in a real mess too! Obviously, the Euro Area countries could have a shotgun wedding, and pool debts, run a current account surplus and become a second Japan. But where exactly is Japan headed? No easy answers here, and even harder ones coming up further down the line.

32 Responses to “Portugal Gradually Shuffles Its Way Towards the Front of the Debt Queue”

SimonMarch 11th, 2012 at 8:53 pm

What is not often mentioned is that Portugal has been trying to cut its deficit and restructure its economy unsuccessfully since Barroso became prime minister in 2002 (he gave up and quit when offered a better job). Successive programs and efficiency drives have produced zero results as evidenced by the current situation. When 10 years of deficit reduction have not worked, why should it work now? Unfortunately Portugal is a country run by lawyers that is suffocated by its own State sector, with an arbitrary and incestuous system that revolves around the protection of the vested interest, stifling private sector risk and innovation.

Ewubor Victor OriekaoseMarch 11th, 2012 at 11:23 pm

In all of these crisis, i have quite followed it since inception. When the warning began during the peak of the financial crisis in the corporate (private) sector that sovereign defaults would follow suit. So many analysis of the crisis at hand and ways forward in which no exact route is better than the other, I'm yet to find a satisfactory analysis that really x-rays the historical dimensions to the problems. In effect, how did Greece and every other country that is ridden with (un)sustainable debts arrived at this tipping or near-tipping points that defaults seems increasing likely with the passage of time. Would appreciate a link if any that really emphasizes the causes of the present crisis.

PMDMarch 12th, 2012 at 1:10 am

Dear Edward,

Let me tell you that I admire your work no matter what I disagree with you. And I respect your motto, "dont shoot the messenger".

Now let me ask you something. do you really believe in the assumptions of Jürgen Michels and his team at Citi?

Let me give you an example, just for ilustrate how bad are that kind of assumptions:

"For example, a 10% fall in retail sales demand may produce a much more dramatic fall in profits, which means that tax income from profits can be almost wiped out."

So, what the mean in their scenario? That with a fall in the retail sales the profits of companies will be wipe out, so the fiscal revenues. But is that correct? No it is not. Why? Because most of big coroporations make theirs profits ouside their home domestic market. May I give you one good example? For example, one portuguese retail seller:

So what are the reality? Theirs paid taxes rose because the majority of theirs profits were made outside Portugal.

Now, may I give you another example?

Look the taxes paid. A small fall even if their home activities fell strongly.

Do you want another example?

Look how much fell their taxes paid. Just a small fall even with nasty iberian conditions in their market.

These are three examples of the portuguese corporations who pay the most corporate income taxes. In fact, almost all the fiscal revenues from coporartes are paid by companies listed in their stockmarket. So you can check how bad is the work by the Citi and their team.

But you can check more how bad the work of them. Are the corporate taxes very important to portuguese state revenues? You can check theirs figures:

I know that you can understand portuguese. And the income from corporate taxes only means 15% of theirs fiscal revenues. In fact, last year, even if the profits fell in general the taxes income rose. Why? A mix of high levels of taxes and not bad profits from corporations because their main activities are outside the home market.

And this is only one part of the bad analisys from the Citi and their team.

But I have more things to tell you. For example. Portuguese exports:

" We don’t have official data from the statistics office on quarter by quarter changes in exports, but the data we do have suggests they stagnated when compared to the third, following a pattern generally seen across Europe. "

In fact, portuguese exports had their best November month ever. Only in December, theirs exports showed some weakness, when rose 4%, in value, comparing with 2010 December. And one month isnt not enouph to tell that they are suffering a lot the european weakness.

Why portuguese exports are so strong even if european economies are weak? Because their exports are rising very fast to new markets, like Brazil, China or even India or Japan. Portuguese statistics office dont give us figures about the exports in volume. But give us in value and that what is important concerning theirs current account balance. And theirs exports rose a lowards new markets, like China. Theirs exports rose 67% in 2011. Towards Brazil rose 33%. Towards Japan 50%. Towards Argelia rose 68%. and so on.

Thats why portuguese authorities are denying to haircut their debt. Portuguese economy is changing fast and better even what they expected. And the majority of the profits paid to the state come from corporations who make them outside Portugal. You can chekc by yourself. Just inquiry theirs corporarte websites. Any investor has open acess to theirs balance sheets and earnings reports.

Theirs exports rose 5,8% in volume. And 12% in value in the last quarter. tell me how much countries did better than Portugal? How much? if you find so much, please tell to yours readers.

(Part one)

PMDMarch 12th, 2012 at 1:11 am

What you, dear Edward fail to understand is this. Portugal suffer some external and internal economic shocks however after some years of pain, after 2005, theirs exports started to rising fasta again. But not enouph to have big impact in theirs economy because the credit cruch. And as they are very indebted even if they have an huge level of activities around the world, they have a lot of problems to explain what is the situation in their economy. Its not like Spain, its not like Greece or even Ireland.

Mr. Krugman made some bold statements about their situation but after some days in Portugal, and having meetings with portuguese authorities, like their central bank, government and others, he finally understood the portuguese economy is "special". He even said: we cant explain very well the portuguese problems. And said; I couldnt do better or different of what portuguese government is doing.

And mr. Krugman is right. Keynesianism doesnt explain very well the potuguese economy and even their path to fix theirs problems. Not keynesianism or other school of economic thought in the mainstrem. I will not say wichone fitts for them because, Im affraid, no one understands very well.

But for me, these words are plenty wrong:

"while if it doesn’t the country can’t regain export competitiveness, and there doesn’t seem to be any easy way round this, which is why I can’t see the reason for policymakers being so adamant Portugal doesn’t need restructuring."

You are wrong because you are working with bad assumptions. How do you gain competitiveness? Lowering wages and costs? But theirs wages are lower than almost western europe, how can you regain competitiviness doing that? Through wages like in the developing world?

Now you must understand management not economics. If I manage one company, to rise my margins and profitability what can I do? Cut the expenses, rise the sales or a mix of these policies. What economists think is this: lets cut expenses. Is that enouph? No, it is not. Is what you thinka and most economists think: lets cut the expenses to gain competitiviness.

However, a experienced manager or a clever one will not do that if cutting expenses could damage my operations. A experienced one will try to understand if the goods that we sell are really priced. What this mean, is like that. We sell some goods that generate some sales but if we can sell more dear the products we can rise the margins. can we sell dear our producion? If yes, how? Where? and so on.

The portuguese problem is that one. Theirs costs are not very high, what is bad is their level of productivity. How can they rise the productivity? Exporting and selling more dear. Because theirs costs can not be more cutted. And can they sell more dear and export? Yes, they are doing know. After some years of lack of exports growth, they are rising again. In the last seven years, theirs exports rose even better than Germany.

What most of economists fail to understand the portuguese problem is this: you think like an economist not a business man or a manager. And you think: lets cut theirs wages, lets regain their competiviness. How? Cutting wages? This is not the answer. Not for portuguese economy, not for UK or even USA. You are trainned to think in one way that doesnt fit to manage on company or even one country.

And what is more concerning is seeing to much people giving opinions about the portuguese problems but you fail to check even theirs facts. is like to try to manage one company in the moon leaving in the earth. the economists are so good, so good, that I am affraid to read them. They know everything about nothing. And is more monstruous when those economists, who even dont know the real facts about economies, have power to spread theirs ideas and visions, and theu have huge impact in others lives because the financial markets are gambling casinos where the fiction creates their own reality. Im not the only one who believe in that, but. Mr. Soros are well known to right one famous book about this problem.

Dear Edward, I like to read you but, no matter what tou think, I will never follow what you think and publish. Why? Because the lack of objectivity in yours opinions, because you have an opinion before to study the subject. Thats why you even didnt checked the validity of the work made by the Citi. Do you really believe in theirs assumptions? Did you checked? No, of course not. For example, theirs current account deficit was 5% of their GDP, last year. Did you know that, mr. Edward?

My best regards,


SimonMarch 12th, 2012 at 9:14 am

What is PMD's point? A collapsing national economy does not matter because it does not affect large corporate tax contributions? even though he goes on to say that these contributions are not that important anyway.

Interesting first of all that he cites the example of Jeronimo Martins, which seems to be trying to get out of Portugal.

But none of this is important. Countries cannot depend on a few multinationals generating profits in other countries to support their economy. Where is the growth at home, where are the SMEs – squished by the state and by state companies.

Portugal's difficulties are not of the moment, they are a result of 20 years of policy failure and reluctance to deal with the heart of the problem.

PMDMarch 12th, 2012 at 11:50 am

Dear Simon,

I know its hard to you understandd but the Citi team made a bad job.

I only gave some facts to deny their scenario. They are plenty wrong.

Concerning this:

"Interesting first of all that he cites the example of Jeronimo Martins, which seems to be trying to get out of Portugal."

No. No you are wrong. In fact, almost all the portuguese groups listed in the stockmarket have theirs main holding in Netherlands because Holland have a good fiscal system to avooid double taxation. And as this group will start theirs operations in Colombia, they moved to Holland.

As I said, almost all the portuguese groups listed in the stockmarket and have their majority activities outside the country have theirs main holdings in Holland.

Next time I suggest you to study better the facts and give less advice who really has more information about the reallity than you.

Kind regards

SimonMarch 12th, 2012 at 12:06 pm

Sorry PMD but I could not care less what Citi says – I am not clever enough to judge their work. I am concerned about what is actually happening in Portugal.

Please – what is your point about companies moving to Holland? Again maybe am not clever enough to understand, but it does not seem to be good thing.

If I have got any facts wrong, as you seem to suggest, please enlighten me.

PMDMarch 12th, 2012 at 12:36 pm

Dear Simon,

My point is this. You gave an example of one company changing their main holding to try to prove something. I only said youre clueless about why did so. Not because theyre feeling from Portugal and the impact in theirs fiscal revenues will be positive.

So, whats really your point?

Kind regards.

PMDMarch 12th, 2012 at 1:04 pm

Dear Simon,

Whats your point? Are you cluless about that?

Perhaps my english inst good but you are clueless about Portugals economy. You tried to prove that the compnies are fleeing away from Portugal, I said you are wrong and clueless about that. You tried to be smart I proved to you that you dont have any idea about these problems.

Are you satisfied? I hope so. So, next time, dont to try to be smart than me. I am not a genius but I am smart enouph to show that you are clueless about portuguese economy. So, next time, try to be more polite and dont pretend to be more smart than others.


Edward Hugh Edward_HughMarch 12th, 2012 at 7:34 am

Hello PMD,

"Now let me ask you something. do you really believe in the assumptions of Jürgen Michels and his team at Citi?"

No, I think I explained in the post, I think they are too optimistic, they simply focus on funding problems, and not for example that it will be quite impossible for the structural reforms to raise the trend growth rate in Portugal. They also are too kind to the adminsitration about implementation issues. The pensions grab to "maquillar" the numbers is outrageous, and dangerous since the state is taking on ever more liabilities it simply can't meet.

"For example, a 10% fall in retail sales demand may produce a much more dramatic fall in profits, which means that tax income from profits can be almost wiped out."

This is me, not Citi, just explaining why people have so much difficulty meeting their deficit targets in Spain, Greece, Portugal, Italy, Hungary, Latvia etc.

"What you, dear Edward fail to understand is this. Portugal suffer some external and internal economic shocks however after some years of pain, after 2005,"

Well this is not my view. I think Portugal has severe ageing and demographic problems, which have been reflected in the growth rate since 1998. I tried to argue this in my Portugal Sustains post (a un on Sostiene Pereira) back in 2009:

Incidentally, I am sorry your second comment took so long in appearing. For some reason it got stuck in the system and I have just published it for you.

PMDMarch 12th, 2012 at 12:15 pm

Dear Edward, Thanks for your answer.

Concerning the second commnent, I think something wrong hapenned when I tried to insert when I was editing and formating the text. It wasnt your fault, maybe it was mine.

Let me show more things about what you believe.

"No, I think I explained in the post, I think they are too optimistic, they simply focus on funding problems, and not for example that it will be quite impossible for the structural reforms to raise the trend growth rate in Portugal."

Why do you believe in that? Because trending demographics? Yes, I know, more or less your work. Is that possible to change those trends? I thin so. Where they did that inversion? For example, scandinavian countries.

But I have more disgrameents with you concerning those "strutural reforms". Wich kind of reforms are you talking about? And what the goal of those reforms? This is the question we must aks before to change an economy or even a company. In facto, since some 10 years ago, portuguese governments, all, made strutural reforms. But wich kind of reforms and goals? This is important, you must understand. For example, when almost all the international corporations fled the country, after the changings in the international economies to open the borders to external competion (China get inside OMC, East get inside EU, etc), Portugals seeked to change theirs own companies to move towards a more value added production. How? Investing a lot in Science. This is an eocnomic reform but nobody sees that as in reality is. Why? Because the mainstream economists are stuck in fictious models. But the portuguese made those economic reforms and they are starting to reap those kind of economic reforms started almost a decade ago. You adn almost the mainstream economists is missing all these reforms.

Their potential product is changing too. If you Edward, read the last economic winter report from their central bank you will see that change in the trend in their potential GDP.

Is it possible to Portugal to have an economic growth above 2%? Yes it is. Just check thei figures concerning the economic growth in their third quarter and you can see that is possible. Theirs exports are very strong and enouph to have an economic growth above 2% afther their internal demand ends their adjustment.

I fact, Portuguese economy is not so strange as mr. Krugman thinks. The problem of the mainstream economists os this. They are stuck in economic models that doenst work like that. In reality doesnt work how they think its work. And thats why they dont understand the portuguese economy and even they dont have solution for their problem. But they have solution and they will to show how badly is the analisys about them. In fact, as I said yesterday, almost the analists and economists are clueless about the portuguese economy. Before and afrter the international credit crunch. They dont understand how Portugal failed to grow more quickly and theyr are failling to recognise how they are dealing with these problems and how they will exit the crisis in better way than all almost think.

What I ask you, Edward is this. You can understand portuguese, so, please, open your mind, and start research much better the portuguese economy. Believe me, you will change all your way of thinking about economic growth, competitiviness in XXI century in with open borders to international competion, and even those demographic trends that are very, very important (thats why I respect a lot your work even when I dont agree) and can be fixed.

By the way, the portuguese exports rose 13% in January.

Best regards.

SimonMarch 12th, 2012 at 1:03 pm

Do I really understand from what you have written that you think that the Portuguese economy is OK, that policy has been effective. That the government even now is doing nearly enough? Are you really saying that the Portuguese economy does not need structural reform?

Are we talking about the same country?

PMDMarch 12th, 2012 at 1:18 pm

Dear Simon,

Whats your point? I really dont understand you. What do you want? Tell me yours ideas, please. Dont bullie others and avoid to try to annoy others.

Do you believe that portuguese economy is collapsing? Ok. Its your opinion. I say you and almost the majority of analysts are clueless about portuguese economy. If you want to discuss my ideas, I dont mind.

But I must to warn you that I am not so dumb as you think.

Whats your point? Lets discuss your bright ideas, shall we?


SimonMarch 12th, 2012 at 2:07 pm

Sorry if I am bullying you. I only meant to question your apparent position that the situation in Portugal has been misrepresented, and that policy is effective. For your info I am not an analyst – anything I say is based only on experience working in Portugal:
– the economy is declining and is dangerously close to the point where decline may become a collapse.
– the Portuguese economy and system of government is cumbersome and inflexible, designed to protect the interests of the haves, with the state interfering and infecting everything, stifling enterprise and innovation that it not on occurring its own terms.
– this is a situation that has its roots in in late 1990s to early 2000s when Portugal squandered the opportunity afforded it by European funds.
– it is a situation that, despite deteriorating over the last ten years, has not been addressed, except through superficial and aesthetic measures, meant to give a good impression but failing to make a difference.
– the recent crisis has only brought the situation to the world's attention and made the decline more urgent, it is not the cause of the situation.
– Even as the situation seems to be coming to a head, with real crisis looming, the Portuguese ruling class remains reluctant to make real change.

PMDMarch 12th, 2012 at 3:01 pm

Dear Simon,

Could you explain this, please?

"- the economy is declining and is dangerously close to the point where decline may become a collapse. "

Ill be glad to hear how is that so.


SimonMarch 12th, 2012 at 3:11 pm

the economy is declining:
negative GDP growth, rising unemployment.

Dangerously close to the point where decline may become a collapse: 2013 when Portugal will either have to be able to access markets at viable rate or be forced to follow Greece.

PMDMarch 12th, 2012 at 3:33 pm

Dear Simon,

Well, this only words, nothing more and nothing that you can explain:

"Dangerously close to the point where decline may become a collapse: 2013 when Portugal will either have to be able to access markets at viable rate or be forced to follow Greece"

Where is that point? How do you quantifiy that point? What is the economic collapse that you think its the same as Greece? How do you explian that collapse with theirs exports very strong?

Please, give me more hints not wishfull think. You are giving me lagging economic indicators, like unemplyment or coicidental indicators, like GDP fall.

Thanks in advance.

SimonMarch 12th, 2012 at 4:07 pm

Do you claim that the Portuguese economy is growing?

What do you consider would be the result if Portugal cannot return to the debt market in 2012? Or do you consider this possibility too remote to be worth considering?

Note with regard to exports November 2011 to January 2012, 78% increase in exports of processed fuels and 60% increase in imports of primary fuels. Could it be that refineries cannot sell fuel in Portugal so are re-exporting it? Is this the basis of confidence in the Portuguese economy?

PMDMarch 12th, 2012 at 4:13 pm

Dear Simon,

You are making bold and strong words, like any bully but you are not answering the real questions. Only words. I dont expetct more from you, I realise that, but Im giving you a chance to you. Could you explain wich collapse is that one that you see but I am not seing the same? Could you explain me with indicators and good arguments?

You said that tou lived before in Portugal. So, I think you know very well their economy. Let me ak this. What are their main industrial exports? If you are able to show how much do you reallu know that economy, I believe this answer will be easy.

I Ill ask you again: what are the main industrial exports of Portugal?

SimonMarch 12th, 2012 at 4:24 pm

Main current export is the country's most promising young people.

Sorry again if I have been bullying you.

PMDMarch 12th, 2012 at 4:33 pm

Dear Simon,

I knew it. You really dont know.

Well, when you have more than wishful thinking about the portuguese economy you deserve that Ispend my time with you.

kind regards

Edward Hugh Edward_HughMarch 12th, 2012 at 7:53 am

Incidentally PMD,

"For example, theirs current account deficit was 5% of their GDP, last year. Did you know that, mr. Edward?·

In the middle of the post (next to the CA deficit chart) I say this:

"And while both this and the current account deficit have improved over the last year, the rate has been painfully slow, indeed the IMF is still forecasting a CA deficit all the way through to 2016 (and presumably beyond) with a 5% deficit in 2013 and still a 2.8% one in 2016. To put this in perspective, countries in Eastern Europe like Latvia and Hungary who have been through these corrections already now run current account surpluses, and they are still a long way from being out of the woods".

PMDMarch 12th, 2012 at 12:22 pm

Dear Edward,

Please, check the last winter report of Portugal central bank and you will find good information about theirs prospects. By the way, the last and final figures, are better than the prospects. In fact, all the international institutions are failling to make good prospects about portuguese economy. For example, almost all the international institutions (IMF, EC, etc) failed in theirs prospects. IMF thought that Portugals economy would fall 2,2% in 2001, and in fact, the portuguese economy fell only 1,6%. This year they will fail too.

Best regards.

PMDMarch 12th, 2012 at 5:21 pm

I will ask you some patience with me, because I wish to show another point of view about portuguese economy. I ll be glad to explain all that I can and I wish to not annoy mr. Edward.

Also I will be glad if all of us understand the motto: Do't shoot the messenger.

The question that is concerning mr. Edward is real: is that possible for Portugal to sell their debt in the financial markets in September of 2013? I don't have any answer for that question and I really don't believe if someone has that answer. Between today and September of next year to much time will pass and too much new things will change. So, I don't know and in reality, I don't care. That is not my point and goal.

But why I think all the majority of analysts are clueless about the portuguese economy? Because they don't have a real picture about that economy. And because, aggregate indicators doesn't come up by miracle, always have some of kind of explanation.

I will start with some interesting data from Japan. The Japan External Trade Organization publishes the figures concerning the international trade of Japan. And the data are available for the public to gather their information. Like here:

Concerning the month of December of 2001, we can have access to bilateral trade between Portugal and Japan of all year of 2011. What happened in 2011? We find that Portuguese exports rose 86,7% in 2011 to Japan. And we also find that Portugal had a surplus in their trade of goods with Japan, for the first time in years. In 2011, portuguese exports towards Japan rose 86,7% and japanese exports towards Portugal fell 4,1%.

When we access to data from January, we find the same trend. Portugal's exports rose to Japan in January by 30%, year on year. The japanese exports fell a bit, only 0,5% towards Portugal.

This is the first data Ill be glad to show you. Portugal's exports rose 86,7% in 2011 towards Japan, according the japanese organization. But the portuguese statistics office show another figures however show the same thing: a huge rise in the portuguese exports to Japan and a fall in their imports.

Now the question is this. Is this possible? How can be possible Portugal's exports rise so fast to Japan? The answer is: their economy changed fast in the last 15 years, more or less. What are the main exports from Portugal towards Japan? Accessing to portuguese data we find that their exports are machines and others capital goods and chemicals. About 52,7% of portuguese exports towards Japan are machines and chemicals.

Now, with this data, what I want to say to you? I want to say you this, in the last 15 years, Portugal changed their economy. Some years ago their main exports were garments, some processed food, and so on. Last year, their main exports were machines and capital goods, cars and auto-parts, chemicals, plastics, paper and pulp paper, gas and others refined petroleum products, etc. In the last 15 years, the portuguese economy changed a lot.

In the last 15 years, as the international corporations moved towards countries with lower wages than Portugal, the portuguese economy started a long process of adjustment. Instead producing and exporting low value added they started to change their industrial base. And now their main exports are goods and services with much high value added. They have a good surplus in the services because they have the Tourism but also new activities like software houses, engineering, and so on. And they are exporting much more for new markets like Angola (their new fourth market), Brazil, Japan or even China.

So, their economy changed fast but not so fast as it should. Their high investments in the new industrial base and outside their domestic market was financed with debt because inside the Eurozone, the access to cheap capitals was very easy. They invested a lot in new industrial production and new productive activities with very leverage. With too much debt. And with the credit crunch, this all fell apart.

Now I will give you more data to explain more the portuguese economy and my point of view. Ill be glad if you have patience with me.

PMDMarch 12th, 2012 at 6:19 pm

Now I will start with more data. I always like to show data to provide the facts who follows my words and thoughts.

I would like to suggest to you to open the PDF file to start reading and checking the facts.

I will start quoting their report:

"The trade balance improved in 2011, moving from -7.2% of GDP in 2010 to -3.9%, leading to a reduction in the net borrowing of total economy to 5.1% in 2011 (8.3% in the previous year)."

The portuguese economy adjusted so much in 2011 that their deficit in the balance of trade (of goods and services) fell to 3,9% of their GDP. And their net borrowing fell to 5,1% in 2011, better than the portuguese central bank calculated in their economic report of winter. In the prospects of the Banco de Portugal, they believed that they would need to borrow 6,7% of their GDP. (… )

Why this fall in their deficit of the balance of trade? Because the exports rose much more than they thought it would. And of course a fall in their imports. Why the exports are very strong? (In 2011 they rose 7,4% in volume and more than 15% in real terms.) Because their industrial base its better than all think. And because portuguese companies are finding new markets outside Europe.

Now I wish to show you more data. Please, check the page 2 of their report. There we can find an image. A very good and powerful image. You can see how much fell the GDP and theirs internal demand. And you can compare with the last fall in their GDP. If you see very well, you will find this. That current fall in their economy is more related with the huge fall in their internal demand. However, even with this huge strong fall in their internal demand, theirs exports are rising even with the weakness in the european economic activity. And that's why all the previous prospects for portuguese economy for 2011 failed. All the prospects had in mind a fall in theirs exports. But theirs exports rose much more than all thought. That's why EC forecasted a fall of 2,2% in the portuguese economy but failed and the GDP fell only 1,6%. The same applies to IMF, for example.

Now I will give you some more data:

This is the report form portuguese account finances in the first month of the year. January. And I suggest you to check theirs figures, please. Why? Because theirs fiscal revenues are better than all forescated.

Now I will give you two more links. One in englis and another one in portuguese. (Mr. Adward will understand very well the portuguese.)

Why those two files are very important? Because show us one simple thing. Even with the fall in their internal demand, theirs fiscal revenues are better than all think. For example (check the second file and verify the page 9) the fiscal revenues on retail sales (the VAT) rose 5,7% but the sales fell 8,5% (first file).

In fact, the fiscal revenues of the VAT are better than they thought. Why? Well, higher taxes and better fight to fiscal fraud. Even with the fall in their retail sales, the fiscal revenues are rising.

Of course this is only one month. This is not settled but give us a better situation than we are all thinking. And that is a powerful indicator of the next months. And this is not what mr. Edward believes: a collapse in the fiscal revenues because the fall in the portuguese internal demand.

In fact, even their fall in the internal demands is showing signal of strength, when the fall in the retail sales is slowing (January from December), the fall in the services businesses fell less in January and the industrial production is rising because their strong exports.

Now, why their internal demand is not so bad as all are thinking? Because theirs exports and because their major corporations make theirs profits outside Portugal. All that helps to fight the huge fall in their internal demand. And the fiscal revenues are better than we could imagine and their internal demand is showing signals of strength.

Others facts explain some things in Portugal. For example, the savings are rising but as the companies have problems to have access to external capitals, they are selling debt directly to privates in Portugal, when until some time ago, they sold in the international markets to institutional investors. That explains a little too why short term deposits is falling in Portugal. Deposits are changing to more long term maturities and to corporate debt.

I will end very soon. Please, I need some more of you patience.

PMDMarch 12th, 2012 at 6:58 pm

I wish finish with these words.

How can we explain the strong portuguese exports? Because, in the last decade they changed their industrial base. However, a lot of problems subsists. But we can have two kind of structural economic reforms. The economic reforms to fix short term problems, like high leverage, high debt, and so on. And we have others reforms who changes one economy through more spending. Not cutting. When about 10 years ago, one government started to finance science research between private companies and public institutions, like Universities, nobody realised how long it took to have good results. But that results it came and it will come much more.That kind of investment is the only answer to the fall in the demographics. Only with better productivity and high output generated with high value added production in ours societies we can face the demographic problem. Or waiting until the economic conditions generate confidence and jobs to the people and they start to have more children. Like in the scandinavian countries.

When the credit crunch came the portuguese economy was starting to reap the investments in better economic activities and international activities. Between 2000 and 2005, because the high level of the euro, international corporations runaway from Portugal. Theirs exports didn't grow and the portuguese companies were not ready to fight in the international markets and even inside home. Between 2000 and 2005, they payed the error to have one currency too much strong for their economy and theirs exports were very weak.

After 2005, theirs exports started to rise again because their industrial base started to adjust to a new internal and external environment. Theirs exports started to rise and they started to control better their public spending. In fact, before the credit crunch, portuguese public debt was not rising too fast relative to their GDP. The credit crunch hit portuguese economy when they started to reap the benefits of economic reforms made in first years of the decade.

When the credit crunch hitted the portuguese economy, they never thought that all that debt, together, would be very dangerous. When the credit crunch hitted Portugal, public and private debt started to pinch their systemic risk. And that's why they payed dear this sovereign crisis. Their economy suffered a lot when they started to improve their industrial base and having good results. And all that internal demand, financed with cheap money from the silly markets, has to be adjusted because it was too high for their economy. But as their adjust their internal demand and start having more results from their new industrial base, their economic activity will start rising again.

In the third quarter of 2011 (please check the files) if you exclude their internal demand, their economy could grow more than 3%, year on year. I believe that will happen very soon as the internal demand stabilizes and investment will start rising again through new productive capacity. As they invest more in goods and services to sell in the international markets, their potential GDP will rise again. As their activities are more focused in goods and services to export, as they are doing now, their exports will rise much more. And their productivity will do the same as their potential GDP. The winter report from Banco de Portugal showed that. The trend is rising again.

Which school of thought explain that? Some but not of the mainstream. However, even if mr. Paul Romer is not in the news, portuguese follow something like his ideas. And they are changing fast and they are reaping some results of that structural reforms, even not in the mainstream.

I will finish with another link. Just to show what is changing fast in the portuguese economy:

Please, study those financial figures and you can study what that company export. This is one new portuguese company in the international markets. This company exports high technology in their field. Their revenues rose an astonishing 28% in 2010. This is one symbol of one new industrial base. That new industrial base is their strength but nobody looks where they should.

I hope to help you my point of view. My opinion is very different from all the majority of analysts. The motto is right: don't shoot the messenger. Even if you disagree or don't understand my words.

Best regards to all.

Aegean1972March 13th, 2012 at 8:25 am

MArio Draghi could do something smart, that could save him alot of money down the road and could save him time in solving the euro debt-crisis.
The recipe is based on growth. Haircuts alone and austerity cant solve the huge debt problems. They shrink GDP's and the ability of nations to pay back debts.Greece is a prime example of how devastating austerity can be for an economy, if it isnt followed by a growth strategy.

So, immediatly focus on stimulating-packages, that will help peripheral nations grow their GDP and their economies. Make use of the LTRO money and make banks loan the money to the local markets instead of depositing it back to the ECB. Europe could be saving alot of money down the road, if they focus their efforts on stimulating the periphery's economies, rather than JUST enforcing austerity, which has losses for the banks and eliminates a nations ability to pay back debts. Its a loose-loose senario. Think out of the box and apply a win-win senario.

Growth plus sensible austerity plus reorganization of the PIIGS.

Chocking the economies is a recipe for huge losses and long term recession.

MaryusaJuly 6th, 2013 at 7:38 pm

So, immediatly focus on stimulating-packages, that will help peripheral nations grow their GDP and their economies. Make use of the LTRO money and make banks loan the money to the local markets instead of depositing it back to the ECB. Europe could be saving alot of money down the road, if they focus their efforts on stimulating the periphery's economies, rather than JUST enforcing austerity, which has losses for the banks and eliminates a nations ability to pay back debts. Its a loose-loose senario. Think out of the box and apply a win-win senario.
You are definitely right, but I have a little other opinion
plagiarism blog