Portugal’s Debts Are (Also) Unsustainable, from Eric Matias Tavares

SLL tries to prepare its readers for tomorrow’s crises today. Here’s a lengthy but astute article that will get you up to speed on the next European debt crisis: Portugal. Fro Eric Matias Tavares, of Sinclair & Co., via zerohedge.com:

Portugal’s Debts Are (Also) Unsustainable

Everyone seems to be focusing on Greece these days – a country so indebted that it needs even more loans to repay just a fraction of its gigantic credits. Clearly this is unsustainable and something has to give. Even the IMF agrees.

But what about the other Southern European countries?

Actually, Portugal’s financial situation is looking particularly shaky, and any hiccups could have serious cross-border repercussions from Madrid all the way to Berlin.

The prevailing narrative is that Portugal has been a star pupil compared to Greece, with austerity delivering much better results:

• The government, a coalition of a center party and center-right party that together have held the majority of parliamentary seats since the 2011 election, pretty much followed all the major guidelines demanded by its creditors (the famous “Troika”) pursuant to the 2010 bailout, and was even praised for it.

• Exports have performed exceedingly well given everything that was going on domestically and abroad; the managers of small and medium enterprises in Portugal are true heroes, operating in difficult conditions and with limited access to credit.

• Portugal has recently become a darling of international real estate investors and tourists.

• The country’s citizens have stoically endured a range of tough austerity measures with surprisingly little social disruption.

So it is understandable that hopes for Portugal’s future are much rosier than in Greece… AND YET ITS FINANCIAL SITUATION IS ALSO UNSUSTAINABLE!

We realize that this is quite a bold statement. So to support our argument we will use some simple math to show where government finances stand after five years of austerity.

Simple Math, Hard Truths

The Bank of Portugal (“BdP”), Portugal’s central bank, publishes debt statistics of key sectors in the economy on a quarterly basis. The link to the latest publication can be found here.

As of March 2015, non-financial public sector debt stood at €288 billion, or 166% of GDP. You may think that there’s something odd right there because you are used to hearing that the Portuguese government “only” owes 130% of its GDP. That’s because the media generally uses Maastricht treaty calculations, not the total amount that the government owes as a whole (which includes public companies, for instance). But what’s 36 percentage points of GDP among friends?

OK, let’s do some math:

• We start by dividing €288 billion by 166% to find out what nominal GDP the BdP used in its calculation: about €174 billion;

• Next, let’s assume that the cost of debt on all that government debt is only 1%. In this case, the annual interest expense for the government should be 1% x €2.88 billion, or €2.88 billion. We know that this is very low as the actual interest expense in 2014 was almost €7 billion (and likely not all of it, but government accounts can get quite murky);

• Then we assume that Portugal’s nominal GDP grows at 1%, which is not stellar but certainly better than recent years – from December 2011 to December 2014, the average nominal growth rate was actually -0.6% (BdP figures). So that’s 1% x €174 billion, or €1.74 billion;

• Finally, we compare the assumed interest costs with the nominal GDP growth: €2.88 billion vs €1.74 billion.

See what we are getting at here?


As a result, government debt-to-GDP can only rise from here, especially as the government seems incapable of balancing the books.

To continue reading: Portugal’s Debts Are (Also) Unsustainable

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