With Portuguese interest rates above the 7 percent level at which their sovereign debt—even if it is considerably lower than that of say Greece—becomes unsustainable, the point in time at which the country will be forced to accept an EU-IMF financial assistance package looks imminent.
It is increasingly evident that the Portuguese government’s attempt to secure access to non-market financing via a series of private placements of new debt has backfired. Rather than imbue financial markets with increased confidence about Lisbon’s improved short-term liquidity position through access to “other capital sources”, private placements of debt instead reaffirms financial market fears that Lisbon has “something to hide” and is fundamentally not solvent under current policies. In this suspicion, markets are completely right.
As I have argued on RealTime previously, it is not an appropriate role for the ECB to provide unconditional financial support to a eurozone government, which is clearly failing to grasp the cause of its current problems. Portugal may have managed to reduce its deficits somewhat since May 2010 and may have lower debts today than Greece. However, the country shares with Italy the poorest growth records in the eurozone since 2000 and probably on current policies face the worst long-term growth prospects of any eurozone member. The simple fact is—as can be seen in figure 1—that Portugal has by far the lowest skilled and least flexible workers in Europe.
Figure 1 on the X-axis has the OECD Employment protection legislation value for regular employment1 in 2008 and on the Y-axis the share of the working age population with at least secondary educational attainment in 2008. On both these key long-term structural metrics, Portugal performs worse than any other eurozone member and indeed has workforce with lower skills and much less flexibility than emerging economies like Turkey and Mexico. Financial markets are right to ask where growth is going to come from under these circumstances.
To restart growth the Portuguese economy needs a complete reset, an overhaul of the magnitude that Greece is now going through under the auspices of the IMF/EU/ECB. Unfortunately, there is no likelihood that a government that reduces its annual budget deficit by things like tinkering with the pension funds of the former telecoms incumbent can be relied upon to do what Portugal needs to grow again.
Once EU and eurozone leaders have agreed on a roadmap for new eurozone governance and the details for how the EFSF/ESM will operate in the future by no later than their March Summit, Portugal should by April be the first new client.
1. This indicator is includes the following type of data; ” Individual dismissal of workers with regular contracts: incorporates three aspects of dismissal protection: (i) procedural inconveniences that employers face when starting the dismissal process, such as notification and consultation requirements; (ii) notice periods and severance pay, which typically vary by tenure of the employee; and (iii) difficulty of dismissal, as determined by the circumstances in which it is possible to dismiss workers, as well as the repercussions for the employer if a dismissal is found to be unfair (such as compensation and reinstatement).”