Portugal

Following its heyday as a global maritime power during the 15th and 16th centuries, Portugal lost much of its wealth and status with the destruction of Lisbon in a 1755 earthquake, occupation during the Napoleonic Wars, and the independence of its wealthiest colony of Brazil in 1822. A 1910 revolution deposed the monarchy; for most of the next six decades, repressive governments ran the country. In 1974, a left-wing military coup installed broad democratic reforms. The following year, Portugal granted independence to all of its African colonies. Portugal is a founding member of NATO and entered the EC (now the EU) in 1986.

Economical characteristics

 * Currency: Euro (ISO code: EUR)
 * Central bank discount rate: 3% (31 December 2008)
 * Commercial banks lending rate: 8.35% (31 December 2008)
 * is part of the Eurozone 

Notable events:

 * Banking crisis: 1828, 1846-1847, 1890, 1920, 1923, 1931-1932
 * Years in inflation: 9.5% (share of years 1800-2009 with annual inflation above 20 per cent per annum)
 * Public default: 1828, 1837-1841, 1850-1856, 1892-1901 (external)

Economic crisis
The troubles of Portugal were described as a chronically low savings rate that forces a reliance on foreign investors to finance persistent deficits. Portuguese exporters have been losing market share to competitors since entering the common currency in 2000. That, in turn, has pushed the government to borrow from abroad to finance the current account deficit, pushing debt to its current levels.

As of April, 2010, the Portuguese government has taken pre-emptive steps to cut spending and raise taxes. Portugal’s debt, at just under 90 percent of gross domestic product, was still lower than Greece’s 113 percent level. The savings rate was 7.5 percent of gross domestic product (compared to 6 percent for Greece). In contrast, Italy had a savings rate of 17.5 percent, Spain 20 percent, France 19 percent and Germany 23 percent.

In a burgeoning welfare state, citizens were granted a multitude of social and economic rights, including the right to work, housing, education, culture, health, and social security. Prior to the 1974 revolution, the government spent about 20% of GDP, mostly on the traditional functions of military defence, domestic administration, and infrastructure. Since then, driven by social expenditures, the weight of government has risen to 46% of GDP, higher than the European average. Over the same period, the number of public-sector workers quadrupled.

Since the revolution, Portugal has not even once avoided a fiscal deficit.

In the 1980s, Portugal has shifted towards free markets. Limited-term work contracts have attenuated the impact of its labour laws. The constitution was amended to allow the privatization of previously nationalized firms. This led the country to its best economic performance of the post-revolutionary era.

The country's adoption of the euro reduced debt-servicing costs. Figuring that giving up its own currency would force the government to implement market reforms, instead of resorting to the previous ways of depreciation, the bond market lowered the risk premium charged on Portuguese debt. But few reforms were made.

2011
In January, 2011, Portugal’s prime minister Jose Socrates insisted his country doesn’t need a bailout and is cutting its debt faster than promised. He also said Portugal ‘won't ask for any financial help because it's not necessary.’ Commentators pointed out that that is precisely what Ireland said in the weeks before it accepted a €90 billion bailout and Greece said before it bowed to market pressure and accepted a €120 billion handout. Several analysts expressed worry that a bailout of Portugal could speed up the rate at which the euro zone’s sovereign debtors fall.

The interest rates, or yields, as well as the cost of insuring money lent to the Portuguese government have been rising on the government debt markets. That has prompted the European Central Bank to start buying Portuguese debt and has sparked reassurances from China and Japan that they too will buy the debt to try and prop up prices.

By February, 2011, the rising costs to service Portuguese debt led to speculations of an imminent bailout. Athanasios Orphanides, a member of the European Central Bank's governing council, said that Portugal's case is "particularly urgent." He warned that failure to come up with convincing changes to fiscal policy and competitiveness could destabilize the 17-country euro zone.

As of July, 2011, the nation's long-term government bond rating was cut by Moody's to Ba2, which is two levels into junk, and assigned a negative outlook, meaning further downgrades were possible. Peers Fitch Ratings and Standard & Poor's Ratings Services have each recently cut Portugal's ratings. They currently rate Portugal at BBB-, which is the lowest investment-grade level and two notches above Moody's new rating.

The downgrade was driven by an increasing probability that Portugal will not be able to borrow at sustainable rates in the capital markets in the second half of 2013 and for some time thereafter. Moody's also expressed concerns about the country's ability to fully achieve the deficit reduction and debt stabilization targets Portugal set out in its loan agreement with the European Union and International Monetary Fund due to "formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system." Private-sector owners of Portugal’s government bonds may be asked to participate in a bailout of the country.

In July, Portugal's new Prime Minister Pedro Passos Coelho has told the nation to brace for further austerity measures after his government discovered a "colossal" €2bn (£1.7bn) hole in the public accounts left by the outgoing Socialists. Portugal's government will have to cover the gap with another round of spending cuts, mostly in the civil service and state-owned industries.

This revelation has echoes of what occurred in Greece in late 2009, when an audit by the new Pasok government exposed a budget deficit twice the level previously declared.

Portugal is obliged to cut the budget deficit to 5.9pc of GDP in 2011 under its rescue terms. That task will be even harder since the deficit was still 8.7pc in the first quarter, and further austerity will have the side-effect of choking tax revenue.

In November, 2011, a former treasury secretary indicated Portugal may need a further 20-25 billion euros in rescue funds to finance public companies that have had their access to market funding cut off.

Links

 * Portugal on Wikipedia
 * Central bank of Portugal
 * Studies from the Library of Congress (1986-1998)
 * BBC country profile
 * Portugal legalizes drugs. Crime/Usage falls. (video), BBC, July 2009
 * Drugs in Portugal: Did Decriminalization Work? by Maia Szalavitz, April 2009
 * Drug Decriminalization in Portugal (video), CATO Policy Forum, April 2009
 * Drug Decriminalization in Portugal (pdf) Glenn Greenwald, 2009
 * Portugal Decriminalized All Drugs Eleven Years Ago And The Results Are Staggering by Samuel Blackstone, July 2012
 * Drug policy of Portugal on Wikipedia
 * Portugal adopts austerity, says no bailout needed by Barry Hatton, November 2010