Monday, January 10, 2011

The Tragedy of Portugal

The Portuguese government was forced this past weekend to issue a humiliating public statement denying speculation that Germany and France had been pressuring it to accept a bailout. The most recent whispers started emanating from Der Spiegel newspaper, which reported that Portugal’s prime minister Jose Socrates had been told it would not be worth his time postponing a bailout that was now inevitable. Other reports followed about eurozone officials, of course speaking anonymously, stating that Portugal should take bailout money sooner rather than later.

These sorts of comments are a sort of self-fulfilling prophecy, an effective vote of no confidence that tells the market that Portugal can’t go on without a bailout. The speculation is driven by officials who some believe are sacrificing tiny so-called peripheral European economies like Greece, Ireland and Portugal, in an effort to stop the bond vigilantes before they get to a country that could really cause banking problems in Germany and France like Spain.

But with Portugal the tragedy of this game is more clear. Portugal is no sinner. In the last two rounds of sovereign bailouts, the recipients were cast as irresponsible spenders that did’t collect taxes and engaged in unsound banking, property speculation and government largesse. And so the German official who helped put the Greek bailout together could dismissively say about the Greeks who were being told to accept austerity measures and high unemployment that “they had their fun.” Ireland’s so-called Celtic Tiger turned out to be a low-tax haven fueled by property speculators and selfish bankers.

But a journalist like Michael Lewis will have a harder time finding corrupt Portuguese monks like he did in Greece. The New York Times won’t be running articles about Portuguese ghost towns with empty houses like it did about Yebes, Spain. There is no property bubble in Portugal. The Portuguese banks have not become big players on the international scene. There is no Portuguese Tiger. No Portuguese export boom. The Portuguese stock market is pretty dull. There are utilities, telecos and banks. The most exciting company listed is Jeronimo Martins, a well-capitalized food distributor that has a great business franchise in Poland.

In the end, Portugal is just a developing nation that didn’t want to be left behind when Germany and France launched the euro. Portugal’s economy actually grew by 0.4% in the third quarter of 2010. Portugal is already implementing austerity measures. Its budget deficit is projected to fall to 4.6% of GDP in 2011 from 9.3%.

Portugal has high debt levels and not enough economic growth, like almost every other Western democracy, not to mention U.S. states like California, Illinois, New Jersey and New York. If it still had the escudo, Portugal may have had better options to deal with its debt problems. Instead, this week it will deal with anonymous quotes as it tries to raise funds in a Wednesday bond auction amid increasing borrowing costs on its debt.