Scaring Europe??? Forget Greece, Portugal and… are the eurozone’s next crisis
In the end, they kicked the can a little further down the road. After keeping the markets on a cliff-hanger for the last week, wondering whether the Greeks might end up getting kicked out of the eurozone, a deal of some sort looks likely.
It won’t fix Greece, and it won’t fix the euro EURUSD, +0.0178% either. But it will patch the whole system up until Christmas — and that will buy everyone some time to concentrate on something else.
And yet, in reality, the real crisis may not be in the east of the eurozone, but right over in the west. Portugal is the ticking time-bomb waiting to explode.
Why? Because the country has run up unsustainable debts, most of the money is owed to foreigners, and with the economy still in deep trouble it may have to default as well. The elections later this year may well trigger the second Portuguese crisis — and that will reveal how the problems in Europe involve far more than just Greece, even if that attracts most of the world’s attention.
All the evidence suggests that, once the debt-to-GDP ratio climbs into the 130% bracket and above, it is basically unsustainable.
Back in 2011 and 2012, when the euro crisis first flared up, three countries went bust.
Of those, Greece is still in intensive care, and looks likely to remain so for the foreseeable future — the Greeks look willing to do just enough to stay in the eurozone, while the rest of Europe is willing to offer it just enough money to stay afloat while making it impossible to grow (it is a reverse Goldilocks — probably the worst of all possible solutions).
Ireland, which was always the strongest of the three bankrupt nations, is now growing again at a reasonable rate, helped along by the robust recovery in the U.K., which is still its main export market.
And then there is Portugal — which is not in Greek-style permanent crisis, and yet does not seem capable of a sustainable recovery.
On the surface, Portugal looks in much better shape than it did three years ago. It has exited the bailout scheme, leaving the program in May last year, after hitting European Central Bank and International Monetary Fund targets. The economy is starting to expand again. Gross domestic product rose by 0.4% in the latest quarter, extending the run to a whole year of expansion, taking the annual growth rate up to 1.5%. It is forecast to expand by another 1.6% this year.
If Portugal can indeed recover, that would be a big win for the EU and IMF. Their catastrophic mix of internal devaluation and austerity looks to have been a complete failure in Greece, but if they can make it work in both Ireland and Portugal, the reputation of both institutions could be salvaged.
After all, two out of three is not too bad.
The trouble is, Portugal may not be ‘saved’ after all.
The recovery does not look very durable. It is mainly is driven by consumer spending and a cyclical uptick in investment. But exports continue to fall, and unemployment is still rising — the latest figures show it up to 13.7% of the workforce.
The real issue, however, is debt. According to the latest figures from Eurostat, the EU’s statistical agency, Portugal’s debt-to-GDP ratio has climbed to 130%. Rather more worryingly, 70% of that is owned by foreigners.
Some countries such as Finland or Latvia have most of their debt held by foreigners — but are in the fortunate position of not having very much of it. Other countries, such as Italy, have a lot of debt, but are in the fortunate position of having most of it owned domestically.
The Portuguese are close to unique, in both having very high debts, and most of it being owned abroad. Nor does it just end there. Once household and corporate debt is added into the equation, Portugal has more debt in total than any other eurozone country, Greece included (which mainly has government debt to deal with). There aren’t any reliable figures on who that debt belongs to, but it is fair bet that is mostly foreigners as well.
So long as the economy is stable and the government is secure, that might not be a problem. Portugal doesn’t appear to have that luxury. The government of the center-right leader Pedro Coelho has to call an election before the end of October. Antonio Costa’s Socialist Party is likely to make sweeping gains on an anti-austerity platform. If it wins the election — and the polls put it ahead — then it is likely to slow the pace of austerity, provoking the wrath of the ECB and the IMF.
If Podemos, the Spanish protest party, does well across the border in that country’s elections, it will embolden a left-of-center Portuguese government to reject the cuts in spending demanded of it.
So far, there is little evidence of investors getting nervous about that. Yields on 10-year Portuguese bonds have spiked back up to 2.7%, from the 1.6% they reached earlier this year, but are nowhere close to the 14% they reached at the height of the crisis. Portuguese stocks have recovered most of their losses suffered as the country went bust, even if they are not quite back to 2011 levels.
But they should be. All the evidence suggests that, once the debt-to-GDP ratio climbs into the 130% bracket and above, it is basically unsustainable. A country has to grow at 3%-plus simply to keep its debts at the same level — and there is absolutely nothing to suggest Portugal can achieve that or anything like it.
At some point, all those foreign holders of Portuguese debt are going to realize it will have to be written off, at least in part. Once that happens, there will be a stampede to sell — and the elections later this year could well be the trigger for that.
Right now, the markets believe Greece can be contained. Perhaps it can. But Portugal as well? That seems unlikely. Most people think the center of the eurozone crisis is in Athens — but it might well be in Lisbon instead.