Portugal: How It Differs From Greece

Includes: EDPFY, PT
by: Labutes IR

In this soap opera that is the Eurozone Debt Crisis, I have read a few times, that after a possible Greek default Portugal should be next in line. But in most cases authors don't provide any specific reason, beyond Portugal being the P in PIIGS or that is the next weakest link in this European mess. Although I agree in part with that view, I think that is too superficial an analysis and Portugal deserves some credit on its own and should be separated from the Greek situation.

In April of 2011, the Portuguese government had to request financial assistance from the European Union (EU) and the International Monetary Fund (IMF) to avoid default. The €78bn ($116bn) package agreed with those institutions includes a wide variety of measures, to make the Portuguese economy recover its competitiveness and allow it to adjust its imbalances in the next years.

Structural Issues and Fiscal Deficit

The main structural problems of Portugal are its structural unemployment, lack of productivity and loss of competitiveness relative to its peers. The Portuguese government is introducing in the last few months a number of structural reforms to increase productivity and competition, although these will take some time to have an impact. For example, the unemployment rate reached a new record high of 14% at the end of 4th quarter of 2011, double the levels seen in the middle of the last decade.

Another structural problem with Portugal is the systematically fiscal deficit. In the last 30 years, Portugal never reached a fiscal surplus. Even in the year with the best result (1999) the deficit was -2.3% of GDP.

Additionally to the structural fiscal deficit problem is the frequent use of one-off measures to achieve the fiscal deficit goals. In 2010, when Portugal was beginning to be under the spotlight of the financial markets, the fiscal deficit was only achieved with extraordinary measures. The pension funds from employees of Portugal Telecom (NYSE:PT), were transferred to the State representing an extra revenue of €2.8bn. Even with this additional revenue, the official deficit for that year was 9.1%.

Last year, the pension funds from bank employees were transferred to the State, boosting revenue by €5.6bn. With this one-off revenue Portugal achieved the 5.9% fiscal deficit agreed with the EU/IMF. Without this measure the deficit should have been over 8%.

Portugal should strengthen its fiscal policy and intends to cut its fiscal deficit to 3% by 2013. But the 'troika' forbid the use of one-off measures so the risk of failing this target, given the track record of recent years, is considerable and may push Portugal to a second bailout.

Macroeconomic Outlook

The Portuguese economy is expected to remain in recession until 2013 at best. The principal austerity measures implemented, namely public sector wages cuts and rises in VAT taxes, are depressing disposable income and given that consumption represents around 70% of Portuguese GDP, it should continue to pressure growth at least in the next two years. Additionally, the government announced last October, vacations and Christmas bonus cuts for 2012 and 2013 for public workers and pensioners. Although those cuts don't affect who work for private companies, people are fearing in the near future similar cuts and are adjusting expenditures downward.

When the bailout was negotiated, the economy was expected to contract 1.8% in 2012, but in last December those figures were lowered by the IMF to a 3% drop. According to 'troika' forecasts, in 2013 the real GDP growth should be 1.2% in 2014 2.5%. This appears too optimist given the current macroeconomic situation in Europe and weak internal demand, the negative risks to these forecasts are considerably high.

Asset Sales

A key distinct characteristic of Portugal from Greece is the implementation of the measures negotiated with the 'troika', under each respective bailout programs. This is obvious when referring to the equity stakes that both countries should sell. Greece should have raised €50bn in disposals, but to date has done only about €1.5bn and their politicians doesn't show any willingness to sell a significant amount of assets under the argument of national sovereignty.

On the other hand, Portugal rapidly (in July 2011) reached an agreement to sell a small Portuguese bank, Banco Português de Negócios, that had been nationalized in 2008, and sold stakes (not yet completed) in Portuguese companies EDP (OTCPK:EDPFY) and REN, raising almost €3.3bn ($4.4bn).

Public Debt and Funding Needs

The public debt currently represents more than 100% of GDP and should reach a peak of 115% in 2013, according to the first review of the Portuguese bailout. This is higher than the eurozone average, but much smaller than Greece. Even after the recent haircut of 53.5% on nominal value of its bonds, Greece only expects to reach 130% of debt to GDP in 2020.

The support program assumes that Portugal will be able to return to, medium and long term, debt sovereign markets by late 2013. Given the ongoing sovereign debt crisis in Europe, this assumption can be very optimistic and is another reason why Portugal will probably need a second bailout program.


Although Portugal has long-term structural weaknesses like Greece, including weak economic growth and a high level of public debt, I think the major difference between the two countries is the implementation of each bailout program. Both lack the ability, in the long-term, to pay back debts but Portugal has shown willingness to resolve its issues and resume to a path that is consistent with financial independence.

This is being recognized by European politicians and Portugal should have access to another bailout program, as shown recently by the private conversation between Wolfgang Schauble (German Finance Minister) and its Portuguese counterpart. This political support is, in my opinion, the major distinguishing factor of Portugal from Greece.

The default of one (or more) European peripheral countries, is nowadays basically a political, rather than a financial, decision and I think Portugal will be used as the 'good student' example. Even if Greece defaults, Portugal will be protected from the contagion risk and won't be allowed to follow the same outcome. In this sense, I believe in a second rescue program for Portugal but not default or leaving the eurozone, something that for Greece probably is just a matter of time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.