Model reformer Portugal in trouble despite its efforts

By Emilio Rappold Jan 27, 2012, 16:37 GMT

Lisbon - Debt-ridden Portugal has followed all the reform guidelines given to it the European Union and the International Monetary Fund - so why are fears growing that it could become the next domino to be toppled by the eurozone debt crisis?

Portugal is facing a 'horror story' despite having 'saved for 10 years,' columnist Luciano Amaral wrote in the daily Correio de Manha. 'Is it not time for us to try something new?' he asked.

Yields for Portuguese five-year bonds soared to the record height of about 20 per cent on Friday, only around nine months after the EU and the IMF granted Lisbon a bailout worth 78 billion euros (100 billion dollars).

Portugal may need even more money, local and foreign experts warned as the EU prepares to hold a summit on budget discipline next week.

Antonio Saraiva, president of the industrialists' association CIP, and former finance minister Jacinto Nunes have estimated they may need 30 billion euros.

Prime Minister Pedro Passos Coelho rejects such views, saying Portugal does not need more loans nor more time to repay its debts. But fewer and fewer people believe him.

Yet Passos Coelho seemed to do everything right.

His conservative government, which took power in June, has cut spending and raised taxes to the point that it expects to trim the budget deficit even below the 4.5 per cent target set for this year.

Employers and trade unions recently agreed on a labour market reform, and state companies are being privatized.

'Look at Portugal. It has done all the right things, it has stuck to austerity, it has stuck to the programmes set by the EU and others, and yet Portugal's bond yields are incredibly high,' HSBC chief economist Stephen King told the television broadcaster CNBC in Davos.

Analysts explain the soaring bond yields with a recent downgrade of Portugal's credit rating by Standard & Poor's. There is also concern over Portugal's poor economic prospects, with the economy expected to shrink 3 per cent this year, and a possible knock-on effect from Greece.

However, Portugal's economic problems date from long before the global crisis.

Growth has been sluggish for a decade - a situation that experts blame on a string of factors, including low productivity, an excessive dependence on labour-intensive sectors such as construction and tourism, and insufficient innovation.

Austerity alone is not sufficient to solve such deep and long-running problems, many analysts now believe.

'Without growth, we don't stand a chance. We'll have to leave the euro and request debt relief,' economics professor Paulo Trigo Pereira warned.

Former president Mario Soares even believes Portugal's economic distress could endanger its democracy.

Soares, who well remembers the corporativist dictatorship that ruled Portugal from 1926 to 1974, was shocked by the sight of soldiers demonstrating against cuts in their salaries and in military spending.

'When even the military takes to the streets, we must finally wake up,' he said.

'If the army seriously decided to intervene, would the EU and the IMF us?' Soares asked. The EU must inject more liquidity into circulation to boost growth, he said, looking forward hopefully to the upcoming EU summit.