Subject title

The likelihood of the Great Portuguese Debt Crisis

Date and standpoint

Lisbon, November, 2008. The portuguese bonds for 10 years are at their lowest at a rate of 3.7%.

Long-term trends
- In 1975 Portugal abandons the idea of still being an Empire, with the loss of the last remaining colonies in Africa, Angola, Mozambique, Cape Verde and Guinea-Bissau. This abruptly diminishes the portuguese exports. - Employment in the public sector on the rise since at least 1968, every single year more than the previous almost quadrupling in effectives. - Low interest rates on private borrowing for a long period since the nineties. - Portuguese debt levels on exponential rise, at the most higher percentage of GDP ever, 68.9%. - Portuguese currency at the entry in the Euro was irrealistically valued which resulted in a sudden real inflation of about 30% causing a great sensation of wealth on the people but curbed growth for the rest of the years ahead. This sensation led to more borrowing of the families unable to cope with rising costs of living but also in order to buy property now artificially over-valued. - This artificial inflation and curbed growth led to the painfull adjustment on the private sector since banks stopped lending money to companies as early as 2002. However this adjustment was not made in the public sector where debt continued to accumulate, mostly to fund the municipal sector, itself unable to borrow money. - Rising salaries in the public sector which by average were 15% higher than in the private sector. - Borrowing by the families inflated even more the prices of housing leading to a gigantic construction industry during the nineties and 2000s that finally was able to seize control of the banks. This seizing kept the housing prices artificially high leading to even more debt on both sectors. This was the oligarchy responsible for the impossible dream that become reality of hosting 1998 World Exposition and 2004 European Cup. - Portuguese banks, with no relevance in the european system, must borrow from the exterior the money to lend to portuguese, creating one of the most important flows of capital to the exterior ever recorded. Only a small fraction of the private debt stays actually in portuguese banks.

- As a relevant curiosity, usually, the biggest crisis occur with about 80 years interval. This maybe due to the people living through one big crisis are dead or out of the system in 80 years time. Portugal had its biggest troubles exactly 80 years ago.

Medium- and short-term trends

Perennial factors
- Baby boomers abroad are returning for their retirement, bringing less money into the portuguese economy. - The 2007 american crisis suddenly stopped lending, which made the portuguese, addicted to debt, fall in the reality hole and realize there was no more money to grab. - European funding was now to be spread over 27 countries mostly in need, when in 1986 only Portugal and Spain were in need. - Savings rate were at the lowest level ever. - Debt addicted companies were now in deep trouble not being able to borrow anymore.

New Factors
- Opening of the national borders would accentuate Portugals peripherical situation, now unable to compete with closer to the center economies of the former USSR and Yuguslavia. - The 2007 crisis hit the anglo-saxonic centered economies, specially Iceland. Adressing this issue, the american and british (anti-euro) powers that be turned to divert attention on theirselves. Weaker european economies were an easy target. - Sudden stop in spending in Portugal, interrupting the ever descending savings rate into a sharp rise in 2008. This predicted a very sudden drop in the private companies results, which were now unable to borrow.

Accelerator and retarder

- The american crisis was surely a catalyst to the event. - National elections in 2009 functioned as a retardant, where politicians tried to hide the problem a little longer. So, in 2008 and with such a grim look we could only imagine the real situation was even worse. - Public investments in very large construction works as World Expo, Euro 2004, the new airport and the TGV line (last two were never accomplished due to lack of funding, but were widely discussed as a stimulus to the economy). This acted as a catalyst. - Politicians signed agreements with major companies for them to build roads and bridges for a future subsidy of the state to them based on surreal numbers. (Right now, the state is paying the builders of a bridge for every car that does NOT pass the bridge, based on traffic forecasts more than 120% higher than the actual traffic there).

Potential trigger-events
- The Lehman collapse. - The Euro which artificially inflated prices in Portugal. - The sudden collapse on public workers admissions.

Dating
With this in mind, I think the portuguese debt crisis where noone will want portuguese debt certificates will be a reality in 2011, two years after the new executive take place after the 2009 election. This will be the period when it will be no longer possible to mask the dark picture of portuguese numbers to the exterior, as well as the time needed for the public internal support for the new government wanes away. Furthermore, all the current national and international trends are not expected to diminish, by the contrary. The current trend of raising taxes and cut the spending denotes a fearful mindset which will propagate to the public confidence in the system, leading to more savings and less spending. This may help the economy in the distant future, but there will be an enormous contraction of the economy in Portugal and on its capacity to repay debts. It is important to note that at this rate of growth, the portuguese economy will be in debt by 150% of the GDP by 2021 ( right now the figures are much higher, but this could be written with the data available in 2008).

Available sources
http://www.omilitante.pcp.pt/pt/311/Economia/581/ http://cegep.iscad.pt/index.php/noticias/93-a-procura-dos-culpados-a-grande-crisefinanceira-e-portugal http://www.bloomberg.com/quote/GSPT10YR:IND/chart/ http://pordata.pt/Portugal/Balanca+comercial+(R)-500 http://pordata.pt/Portugal/Emprego+na+Administracao+Publica+Central++Regional+e+Local497 http://www.euribor-rates.eu/euribor-rate-6-months.asp http://pordata.pt/Portugal/PIB+e+rendimentos-2412