Portugal, Spain become market target after Ireland
Tuesday, November 23, 2010
LISBON, Portugal (AP) — Nervous bond markets pressed Portugal and Spain on Tuesday amid concerns they are the next weak links in Europe’s debt crisis now that Ireland has accepted a massive loan to prop up its banks.
Both countries’ borrowing costs rose and Spain limited the size of a bond sale because traders demanded high premiums to hold its debt. Stock markets, meanwhile, fell — Portugal’s benchmark PIS exchange slumped 1.2 percent, falling for the second consecutive day. Spain’s IBEX was down 1.5 percent.
Spooked by the scale of Greece’s bailout requirements in May and Ireland’s banking failures, international investors are taking a closer look at the finances of eurozone countries and they don’t like the look of Portugal’s accounts. Neighboring Spain looms as the next, much larger, domino to topple.
Portugal is considered a risk because of its meager economic growth and its high debt levels. It has borrowed huge amounts to finance sacred welfare entitlements and private spending — while protecting jobs through outdated labor laws that ignored changes in market conditions.
Investors are “looking for their next target” and Portugal fits the bill, said Emilie Gay, an analyst at Capital Economics in London. She predicts Portugal will have to ask for help by early next year, when it has to begin refinancing billions of euros (dollars) in government bonds.
Others predict the crunch may come sooner, especially after figures released late Monday showed Portugal’s public spending rose 2.8 percent in the first 10 months of this year compared to the same period last year as higher interest payments outweighed a 4.6 percent increase in tax revenue.
Spain’s borrowing costs also soared Tuesday in a sale of 3- and 6-month bills amid fears the country could be affected. The government declined to sell as much debt as initially planned because of the higher rate.
While experts stress that Spain’s large banks are in much better condition than Ireland’s, the sharp rise in Spanish borrowing costs was an ominous sign of the risk that a bailout of Europe’s fourth largest economy would pose to Europe.
“The reality is that Spain is a huge bailout,” said Stephen Matlin managing director of the Matlin Associates investment banking firm in Madrid. “Spain is bigger than the bailout fund, so we would get into an enormous situation if they have to bail out Portugal and Spain.”
Portugal is the more immediate problem. Its budget deficit — how much more the government spent than it received — reached 9.3 percent of gross domestic product last year. That was far above the 3 percent limit for countries using the euro currency, a rule repeatedly broken even by the biggest economies, and the fourth-highest deficit in the eurozone after Greece, Ireland and Spain.
The jump in deficits during the crisis, however, is not the whole story. Portugal’s debt load, amassed over years of overspending, is high and increasingly costly to sustain as borrowing rates have risen during the recent months’ debt crisis.
Pedro Passos Coelho, leader of the center-right Social Democratic Party, the main opposition party, has accused the center-left Socialist government of shifting debt off the books. He said “a good portion of our (official) figures is fiction” and estimated public debt at 112 percent of GDP and the deficit at 9.5 percent. The government, by contrast, puts it at 86 percent of GDP this year.
Allegations of data mishandling are serious because they echo what happened in Greece, where the revelation that it had hidden the size of its debts caused markets to rapidly lose confidence in the government and triggered a funding crisis.
Over the longer term, Portugal’s core problem is how to generate wealth that might pay for its lifestyle — part of a malaise hurting western Europe as countries cope with an aging population and competition from Asia and other regions.
When Ford and Volkswagen spent almost 2 billion to set up a huge new manufacturing plant near Lisbon in the early 1990s, it appeared to be the prelude for a mass arrival of high-grade industry that would power Portugal forward. It also looked like an endorsement of Portugal’s ambition to become a modern western European nation after languishing under four decades of dictatorship and political turmoil following the 1974 Carnation Revolution.
But in many ways it was a false dawn.
Portugal didn’t shed the post-revolution labor laws which made it hard to fire workers as trade unions stood in the way of attempts to modernize. Laying off workers is a bureaucratic entanglement, and entails hefty compensation payments, and workers can refuse proposed changes to their working hours. That turned foreign investors off Portugal.
Civil servants, meanwhile, cannot be fired except in cases of extreme misconduct, leaving the public sector bloated.
Education levels among Europe’s lowest and a cultural reluctance to taking risks on new work methods have kept productivity low — it stands at around two-thirds of that in neighboring Spain.
Portugal stuck too long with traditional industries such as textiles and footwear which have been unable to compete with Asian imports. And, being locked into the euro, Portugal can’t devalue its currency to make its exports cheaper.
State-owned companies are among the most inefficient, and their total debts are estimated at more than 15 billion. Part of the reason is political — in a country where the average monthly wage is around 800 a month, and where hundreds of thousands earn the minimum wage of 475 a month, the government forces public transport companies to keep ticket prices artificially low and pays them compensation for their losses.
Those low earners, meanwhile, have used the cheap loans that came with euro membership to finance purchases of cars and houses.
Portugal, a country of 10.6 million people, remains one of western Europe’s poorest nations, and the outlook is gloomy.
The Bank of Portugal predicts growth of 0.9 percent this year, after a contraction of 2.7 percent last year, and many analysts predict another recession in 2011 due to a government austerity program devised to drive down the country’s debt.
Some Portuguese are despairing of their country ever attaining average European standards of income.
Emigration to Portuguese-speaking countries such as Angola and Brazil, whose economies are flourishing, has soared in recent times.
Alvaro Santos Pereira, a researcher at Canada’s Simon Fraser University, estimated in a recent study that between 1998 and 2008 some 700,000 Portuguese left their country. From 2008 to 2009, he said, Portuguese visas issued for Angola more than doubled to 46,000.
Vasco Costa, a 48-year-old father of three who owns a chain of shops in Portugal, says he’s seriously considering moving his family to Brazil, where economic growth is expected to reach 7.5 percent this year.
“We’re going backwards while Brazil is growing more than 7 percent a year,” he said as he waited to catch a Lisbon subway train. “I only see a brutal period of stagnation here.”
Alan Clendenning contributed from Madrid.