Over the last two years, the news coming out of Europe has been very gloomy when it comes to the credit crisis and large debt levels for a host of governments. This is affecting the confidence of investors, consumers and businesses. As they are reluctant to spend any money until they see some kind of clarity. At the heart of these concerns was Greece. This is because they were considered to be the first country that was impacted by these issues. As a result of their current situation, this is raising fears the Portugal could become the next victim. Contrary to what many people think, the reality is that Portugal is handling the crisis much different in comparison with Greece. This means that any kind of ripple effects could be limited.
A United but a Divided EU
Under the EU structure, nearly all of the member states hold the same currency and trading policies. However, when it comes to government spending, taxation and the issuance of debt each country sets their own limits. This helps some of the weaker members to be able to use their membership to bolster their credit rating and support for the government. The reason why, is because everyone is reliant on each other. This means that if the weaker countries can rapidly develop they will be able to see an increase in their standards of living. During late 1990’s and early 2000’s countries such as Portugal began rapidly increasing their spending on infrastructure and various social programs to achieve these objectives. This was a part of an effort for the nation to improve their underlying levels of GDP growth and balance in the economy.
However, once the recession began is when they were unable to keep up the massive amounts of spending and low levels of taxation. As a result, Portugal was forced to seek out a $130.5 billion bailout from the EU and the IMF. This is problematic, because the high debt levels and slower amounts of growth meant that Portugal was facing a similar situation as Greece.
The Steps to Address these Challenges
Despite these comparisons, the two countries have been going in different directions. As Portugal, was focused on dealing with these issues immediately. This meant that the government began to increase taxes and cut spending on different entitlement programs. Over the short to medium term, this is causing them to face the possibility of a stagnant economy until 2013.
However, these policies have been working. Evidence of this can be seen with the fact that their total amounts of debt to GDP declined from 9% in 2010 to 5%. This is a part of a program to reduce these levels to .5% by 2015. Over the long term, this is having a positive impact. With the government projecting, that the country will start to see a 1.8% rise in GDP growth in 2013 followed by 6.0% increases over the next two years. This is significant, because it is showing how the steps that Portugal is taking are different from Greece.
As a result, any kind of worries about the debt crisis spreading from Greece to Portugal are unfounded. A recent example of this occurred with Banco BPI SA (Portugal’s third largest lender) saying they will not need any more assistance. This is because they were able to remain well above the 9% threshold for liquidity standards (the requirements for passing the EU’s version of a stress test). This is important, because it is indicating that Portugal is taking steps to transform their economy. In the next few years, this means that the tough decisions that are being made now will benefit the country over the long term.