Portugal’s Successful Turnaround? A Fairy Tale

For all the attention given to Greece, is Portugal really that much better off?

Credit: David Stanley -


  • Portugal is no less bankrupt than Greece.
  • Portugal’s debt level - 381% of GDP including private households and non-financial corporations - is well above Greece's.
  • Greece is bankrupt. And all that has been postponed is the official declaration of Greece’s bankruptcy.
  • Greece’s problems manifest via government debt, Portugal suffers from too much debt in all 3 sectors of the economy.

Even a brief glance at the facts suffices. Portugal is no less bankrupt than Greece. The country’s government debt, at 124% of GDP, might be lower than in Greece. However, government debt is just one – even though important – part of the full debt picture.

On an aggregate level, Portugal’s overall debt level — at 381% of GDP when also including private households and non-financial corporations — is well above Greece’s total debt level (286% of GDP).

So while Greece’s problems mainly manifest themselves via government debt, Portugal suffers from too much debt in all three sectors of the economy.

The debt that keeps on growing

At the same time, debt continues to grow much faster than the Portuguese economy. Between 2008 and 2013, aggregate debt grew by 69 percentage points. In order to stop the debt growing faster than the country’s economy, the government sector alone would have to improve its fiscal position by 3.6% of GDP.

Given the overall status of the Portuguese economy and the debt problems of the private sector, that improvement is an impossible task. Trying to achieve it would push the economy into outright depression.

Given all these facts, it is all the more astonishing that the German Bundestag voted unanimously in favor of Portugal’s proposal to pay back loans from the IMF earlier.

Bundestag members did so with great pleasure. Why? Amidst the fraught negotiations in Brussels with the new Greek government about the extension of the Greek program, it was a welcome opportunity to claim that the European approach to the crisis with austerity and reform was indeed working.

For Portugal, it was a good deal, because it could replace relatively costly money from the IMF carrying interest around 4% with cheaper loans from the capital market. But Portugal’s refinancing itself in the markets is not really a sign of the success of the policy mix in Europe.

Given that the country’s creditors are mainly foreigners, Portugal cannot inflate the debt away. It is also in no position to grow out of its debt problem. Assuming a current account surplus of 0.9% (as achieved in 2013), it would take 128 years just to pay back all foreign debt.

Portugal’s sober realities

Debt aside, Portugal faces other quite extraordinary challenges: It has the lowest birth rate in the Eurozone, has to contend with an exodus of the young people to other countries, the lowest overall level of qualifications of its population in Europe, as well as low productivity levels.

With just nine patents per one million inhabitants, Portugal performs better than Greece (with four patents per million). However, it lags significantly behind countries such as Italy with 70 and Germany with 277. What about competing on price alone? That is a difficult proposition for a European country with high debt levels.

Thus, I arrive at two conclusions: First, Portugal will never be in a position to serve its debt. Second, having access to the capital market is only the result of ECB policies and not the result of successful macro or micro policies pursued inside Portugal. But what will this lead to?

A Greek-style solution?

Until now, the Greek finance minister Yanis Varoufakis is one of the few asking openly for direct funding of the governments by the ECB. His proposal that the ECB buy up government bonds and exchange these into interest-free perpetuals still seems to be too creative to be broadly acceptable.

The higher the debt levels of European nations in crisis grow — and this is simple mathematics — the more visible it will become that this debt is out of control. Then, the pressure on the ECB to “fix” the problem with its balance sheet will become overwhelming.

When speaking about Greece, the media often claim that, thanks to the Eurozone’s extension of the program, the “bankruptcy of the country was avoided.” This is of course rubbish.

What was postponed was not the bankruptcy itself, but only the official declaration of Greece’s bankruptcy. Once Greece runs out of money, it won’t be a temporary liquidity issue (as it is perceived in the media), but the open declaration of an already well-known fact.

It is important to realize that essentially the same holds true for Portugal.

Tags: , , , , , ,

About Daniel Stelter

Daniel Stelter is the founder of the German think tank Beyond the Obvious and former member of Boston Consulting Group’s Executive Committee . [Germany] Follow him @thinkBTO

Responses to “Portugal’s Successful Turnaround? A Fairy Tale”

Archived Comments.

  1. On March 2, 2015 at 3:25 pm Watt responded with... #

    I reckon there are more BMWs and Mercedes Benz per head on Portuguese roads than in Germany, France or UK.

  2. On March 2, 2015 at 6:12 pm Paxorales responded with... #

    in other words: austerity policies, instead of reducing debts, shrink GDPs.

  3. On March 2, 2015 at 10:30 pm Ian responded with... #

    The Global dictators are behind the misery and the countries who have sold their soul to the devil the EU must pull out, take their country back. These parasites are causing the misery, because their agenda is to a one world government. Time to tell the globalists to get stuffed.

  4. On March 3, 2015 at 12:32 am Cohen Sommer responded with... #

    For Portugal? Italy, UK, USA, France, Spain and Germany itself. Check their external debts and then come again with this…

  5. On March 3, 2015 at 1:53 am Gabriel Mendes Da-Costa responded with... #

    External debts are not an exclusive problem of Southern European countries but a global one.

    The only difference is that Portugal got paid by the EU to abandon activities like our agriculture in favor of other countries and production quotas and opened the doors to Asian commerce thus destroying the foundation of Portuguese industry (mainly in the textile department).

    Now that the country became a contributor instead of a receiver of European funds, and with the total absence of real GDP relevant industries of our own, how is Europe expecting that countries like Portugal and Greece will prevail financially and grow in order to be capable to withstand minimum “European Union” life levels and repay all the money borrowed?

    In the Portuguese case people often forget that Portugal was one of the richest nations per capita before the fall of the dictatorship in 1974 (although the people was poor, the state had gigantic reserves of gold and currency).

    With a recent “democracy” (founded on dubious people that were mostly and rightfully kept away from state business by the dictatorship) that was still in it’s infancy and needed time to mature, and a population of illiterate farmers used to work sun up to sun down barefoot, the entrance of the country in the CEE was very poorly managed.

    So much money and so many projects given without correct supervision to a country with an infantile population and hordes of “politicians” hungry and lusting for the power that was kept away from them for decades was a disaster.

    In fact, the way Portugal entered the CEE abandoning every once of pride and rejoicing to the fact that , finally, they will be viewed as a real meaningful member of Europe, was a perfect legal steal sponsored by an ignorant population, an immature and self centered infantile political society and European older and powerful powers that took advantage of it.

    The succession of the following facts do not excuse the Portuguese people but do hep explain why a country with 7 million people at the time, with a gigantic reserve of gold, with the greatest extend of maritime waters in Europe up until this day, with hundreds of thousands of immigrants sending rivers of currency into the country every month, with a climatic diversity and geography in small area that actually allows us to grow anything we want and with one of the cheapest labor cost in Europe, managed to spoil a virgin project and end in misery!

    Well, what happens if you give a bag of candy and money to a kid? They will eat the candy all at once and spend the money on useless things. That’s what happened to this immature country called Portugal which “democracy” and structure as modern nation was still being founded.

    Meanwhile, as said previously, the EU took away most of our agriculture, destroyed a living style shared by so many people and shattered our own industry making us rely on foreign factories looking for cheap working force and freeloading fiscal policies.

    As huge sums of money were being spent on useless structures (we call it the “highways money”) that, in many cases, were performed by European companies from the countries that actually gave the money to Portugal (see now why the EU was never interested in being strict about the spending of new coming countries?) and the banks were giving off “free loan money” to this financially illiterate population (how many ethic violations do this represent?), regular people was now learning how to live with “rights”, “social welfare” , “education” and “health care”.

    This was a period of 25 years from 85 to 2010. A generation of new Portuguese people, completely globalized in the 1st world expectations is now watching the downfall of everything we were relying on with the integration in the European union.

    Because of this, thousands of highly educated young Portuguese (contrary to the article, the new generation has an extremely high education level because they have no working opportunities and study as long as they can) leave the country to go, has our ancestors during the maritime exploration period and the post 2nd WW, try to find some place where they can live without being condemn to misery.

    Meanwhile many people still criticize Portugal with non senses like:

    – “They are corrupted” True. But we are not more corrupted than other countries. Switzerland is the most corrupted country in the world as they literally promote and live off world wide frauds and no one complains because they have money to pay creditors.

    – “They are lazy”. False. Portuguese communities are known all over the world as being extremely good workers. In Portugal labor laws are almost non existent and workers exploration is well known and accepted everywhere. We work more hours and have less free time than almost all the other countries and all that for a minimum wage of 500€. And by the way, we have an outrageous tax % set at 23% and everything from energy to communications is more expensive here than anywhere else.

    – “They do not create wealth”. True. Mainly because all of our youth and brains are in exodus mode looking out for themselves. The few bright minds that try their luck here are blocked by the lack of financial loan support and chocked by unreal tax rates that kills off any start up that does not automatically creates profit. Still, we have a growing number of patents every year and specialized niches that sound promising. Giving all the difficulties and the lack of state support for young entrepreneurs, the number of new companies that are making it is really expectational.

    – “They spend there money in the worst ways possible”. True. Mainly because European union never cared about how this new state and immature government and people was reacting to this opportunity. Banks helped created bad habits. Population was rural and illiterate. European Union is as much responsible for it that ourselves.

    And now what? What to expect from Portugal?

    Well, as a country that still bares a lot of old values and a decent sense of pride in the generations from 30 to 80 yo (reflexes of an education with a lot of old remains of a dictatorship that inputed strict honor values in people), we will always prefer to repay what we ow as soon as possible.

    We will always prefer to look good in front of others even if we suffer terribly indoors. Salazar’s dictatorship had the same momentum. It was said that we were “Pridefully lonely” in our successes, failures and hardships of life.

    We finally started to reform our politics and to have a strict look over politicians and people from any high social rank. The peoples tolerance over the known abuses during the time of “fat cows” is over.

    If all our efforts aren’t enough, then, the European project will definitely be a immense failure. It wold then be a useless aggregation of states mid way towards a federation in witch no country truly sees their own reflexion in. No one says “i am european” and no one is in the EU worried about the other members. We have been all there for our own sake since day 1.

  6. On March 3, 2015 at 2:39 am Joao Coelho responded with... #

    Please show proof of your statement: “the new generation has an extremely high education level because they have no working opportunities and study as long as they can..” Because, the statement by itself is only an apriori statement without any empirical data. Where do the Portuguese universities rank worldwide? That might give us an idea of where our education stands.

    As for the comment about being lazy, i agree that the Portuguese can be quite lazy, and cheaters too. I have witnessed it in projects, cut corners, for example. Your comment about the communities abroad is correct and it is indicative that the Portuguese laziness is a function of the society rather than the individual.

  7. On March 3, 2015 at 6:16 pm awareadams responded with... #

    It would be helpful if Herr Stelter could elaborate on his Portugal description, as follows: In the case of Greece and Portugal, the large debts these countries have accumulated indicates that these people have “been living beyond their means”, ie. not working and striving to pay their own way. They are “welfare” recipients but paying for it by borrowing from creditors. OK. This leads to the $64 Question: what can the Portugal and Greek people do–by working–to earn the money they need to support their lifestyles. In other words, what industry, what agricultural products, what services are the people of these two countries capable of doing to pay their way? Is this impossible?
    When the creditors loan these people their $$, they should be prudent in directing the greeks and Portugeese to start working in businesses and services that will pay.
    What’s wrong with the creditors? What can these people do, assuming they are not lazy welfare recipients (as many are in the USA)) do to earn their way?>