World Economy

Portugal Economy Post-Bailout

Portugal Economy Post-BailoutPortugal Economy Post-Bailout

Four years ago, the Portuguese economy was bailed out with EU funds. Last year, it officially exited the program. Now it wants to pay off an IMF loan early. But all’s still not well.

Portugal’s Prime Minister Pedro Passos Coelho does not exactly have an awful lot to write home about. Unemployment remains high, young people are moving abroad. The country’s health service is on its knees, taxes are at record highs, DW reported.

But at least he has found one argument for his claim that his center-right government helped bring the country’s financial crisis to an end: Portugal plans to pay off early the bailout money it owes to the International Monetary Fund (IMF).

At the beginning of the year, Portugal had already decided to pay back 10 billion euros ($11.4 billion) to the IMF. The rest -16 billion euros – are to follow next year.

Finance Minister Maria Luis Albuquerque said Portugal had a comfortable financial cushion, preparing the country for all eventualities. Portugal had also won back the trust of the financial markets, she said.

What she really meant was that while the IMF takes almost 4-percent interest on its money, Portugal can raise funds on the markets for less than 2-percent interest.

Joao Duque, economics professor at the Lisbon School of Economics and Management (ISEG), said the government’s latest decision shows good business acumen.

“We still owe the money, but to different creditors and on much better terms,” he said adding this type of debt restructuring would pay off and also apply to the funds Portugal owes the European Union (EU) and the European Central Bank (ECB).

“A 2-percent cut in interest amounts to a saving of half a billion per year - so it’s a clever move by the government,” Duque told DW.

  Reforms Not the Only Factor

What the head of government, Passos Coelho, and his Finance Minister keep mum about is the fact that the ECB’s cheap money policy also contributed to Portugal’s debt miracle in no small way. The country’s strict adherence to the European troika’s prescriptions and the austerity measures that came with it helped the country regain the trust of market players and secure low interest rates.

No, it was also Mario Draghi’s decision to switch on the euro printing machines. Whoever wants to make some money by granting loans needs to lend money on more favorable terms to Portugal, too. You can’t get anything out from nations like Germany, which are doing well economically. On the contrary – loan providers often have to pay a fee for that.

Anyway, lower interest rates go a long way towards helping Portugal reduce its sovereign debt amounting to 130 percent of GDP, maintains economics professor Duque.

University of Lisbon philosophy professor Viriato Soromenho Marques points to the psychological effect that should not be sneezed at. “That way, Portugal can prove to its creditors that as a debtor, it’s honoring its obligations and can be trusted as a reliable partner,” he said.