Indebted Portugal is the Problem Child of Europe
By Mehreen Khan, 6-8-2015
Asphyxiating debt levels, falling job creation and bad loans still plague the economy, a year after it exited its bail-out programme, warns the IMF.
"A sudden change in market sentiment could render Portugal’s capacity to repay more vulnerable" said the IMF.
Portugal must carry out a bold programme of deep spending cuts and tax hikes to tackle its perilously high debt levels, the International Monetary Fund has warned.
A former bail-out economy often hailed as a poster child for the eurozone's austerity medicine, Portugal continues to have the highest public and private debt ratio in the eurozone at over 360pc of GDP.
The IMF has now told the government to redouble its belt-tightening efforts to reduce its debt overhang and meet a mandated budget deficit target of 2.7pc this year. Should Lisbon fail to cut spending, the deficit is expected to balloon to 3.2pc of economic output.
Portugal officially exited its €78bn international bail-out programme last year. The economy is now expected to expand by 1.6pc in 2015, an upturn largely attributed to favourable external factors such as low commodity prices and a weak euro, said the Washington-based Fund.
Despite noting the recovery was broadly "on track", the IMF painted a precarious picture of an economy heavily exposed to a downturn in global fortunes and fears over Greece's future in the euro.
"A sudden change in market sentiment due to concerns about the direction of economic policies or re-pricing of risk could render Portugal's capacity to repay more vulnerable," warned the report.
A sudden change in market sentiment could render Portugal’s capacity to repay more vulnerable
Four years of Troika-imposed measures has seen government debt hit 127pc of GDP this year, leaving the country "vulnerable to any prolonged financial market turbulence", according to the IMF's monitoring report.
Prohibitive debt levels are now expected to dampen domestic demand, "constrain the pace of recovery and weigh on medium-term growth prospects".
In further worrying signs that the recovery has already lost steam, Portugal's unemployment rate crept back up to 13.7pc in the first quarter of the year, up from 13.1pc in late 2014. Since the IMF's assessment, joblessless has fallen back to 11.9pc in the three months to June.
Last year, the government was forced to inject €5bn to stave off a collapse of Portugal's biggest lender - Banco Espírito Santo. But the country's financial system continues to be plagued by rising "bad" non-performing loans which grew by 12.3pc in the first three months of the year.
Political risk could also throw the fragile recovery off track and precipate a fresh crisis in southern Europe. Despite five years under a compliant centre-right government, progress on implementing structural reforms demanded by creditors has eased off, said the IMF.
The country goes to the polls in October, where the anti-austerity Socialists are on course to win a parliamentary majority. Party leader Antonio Costa has vowed to roll back Troika-imposed reforms and end the country's "obsession with austerity".
In the face of such resistance, the IMF urged any new regime to take office and "regain momentum on structural reforms".
With the growth outlook tempered, the IMF noted that its partners in the ECB and European Commission continued to set "ambitious goals" for the economy, forecasting debt will fall to 107pc of GDP by 2019. The Fund's own projections predict debt ratios will stay above 118pc in 2020.
Mass private sector debt restructuring and the liquidation of "zombie" companies is also needed to bring down downeye-watering corporate sector levels, recommends the IMF.
To meet creditor targets, any future government would have to reverse of public spending pledges and carry out "streamlining [of] public services, rationalising the public wage bill and reducing social security spending and interest costs".
But the IMF voiced doubts any regime could fully implement such a bold programme of cuts.
"The proposed savings on the public sector wage bill, social benefits and pension outlays, in particular, appear overly optimistic when compared to recent spending trends," said the report.
