Bailout
• April 7 – Request for financial assistance
• Sources: (26bn each)
Programme design
(May 2011-June 2014)
• Structural reforms to boost potential growth
– Labour market, product markets (competition, energy, transport, telecommunications, regulated professions)
• Fiscal consolidation
– 1/3 revenues, 2/3 expenditures – Including fiscal devaluation
– Better control over PPP and SOEs (dismissals in public administration not foreseen)
• Banking sector recapitalization and deleveraging
– 12bn euro backstop (BSSF)
• opportunity to address reforms that had not been implemented before the crises;
• supported by structural fiscal measures, such as improvements in tax administration and on spending procedures.
Ownership: high at the beginning
General
understanding
that a change
was needed
Fiscal developments
Fiscal policy measures
• Structural fiscal
– New Fiscal Council
– Expenditure commitments in 2012 – Tighter controls over SOES and PPPs
• Public administration
– Merges, transfers of workers
– Entropy, no significant savings (demotivation)
Fiscal policy
• Fiscal adjustment
– Suspension of 13
thand 14
thmonthly salary payments to public servants and pensions (+exemptions), freeze of promotions, limits to staff admissions
– Higher tax rates (VAT on electricity, capital gains, excise taxes, surcharge on PIT top bracket)
– Lower tax benefits (allowances, exemptions on property taxes) – Savings on social spending, healthcare system,
pharmaceuticals
– Suspension of infrastructure projects
– Lower transfers to SOEs, funds, and local governments
Recession deeper than expected
0.0
-2.5
1.3
-2.2
-1.8
1.2
2.5 2.2
2.0
0.2
-3.0
1.9
-1.8
-4.0
-1.1
0.9
1.8 1.9
-5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0
2008 2009 2010 2011 2012 2013 2014 2015 2016
GDPgrowthforecast (IMF,2011)
GDPgrowth
Updates of the fiscal deficit:
-12.0 -10.0 -8.0 -6.0 -4.0 -2.0 0.0
20072008 20092010 20112012 2013 2014
• 2011
• One off support to CGD, BPN and some PPPs in 2011
• 2012
• Deeper than expected recession
Lower VAT revenues
• 2013
• Constitutional Court rules cuts in 13
thand 14
thmonth components of wages and pensions illegal
• Effect in 2013
Fiscal slippages
Policy response
-• Higher personal income taxes
2013
– Increase in tax rates – Temporary surcharge
This change in strategy extended the austerity measures beyond the more protected public sector to other groups already penalised by the economic downturn
Erosion of public support for the programme
Redistributive concerns start dominating the political
debate (at the spence of structural reforms)
Fiscal devaluation
• Low VAT revenues turned impossible to
replace social security contributions by higher VAT rates
• The government proposed a shift of social contribution from employers to employees
• Widespread protests and abandonment of the measure
• Few months (July 2013) later Gaspar resigns
Political developments
• National ownership of the adjustment programme:
– Initial phase of relative national consensus among the major political actors; support to “structural reforms”.
– Institutional and political dissent (President, Const. Court, Opposition), deteriorating international conditions (slower growth, policy uncertainty), popular backlash against austerity and reform fatigue.
– Poor management of expectations
Loss of reform impetus
• Return to markets
• Most of the bailout loan received
• Adjustment fatigue
Constitutional court
Failed fiscal devaluation
PS, President (deflationary spiral), UGT, Disagreements in the government coalition, disagreements within Troika
The reform program is practically abandoned in 2014
The government opted to let the arrangement expire without trying to find additional measures to
complete the final review
Financial envelope
-15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0
1995 2000 2005 2010 2015
National saving Investment
Current Account
Crowding out
• When foreign capital stops flowing in, the current account is forced to a sharp adjustment
• In the case of Portugal, external lending contracted much more than the IMF expected
• Still, the official financial envelope remained the same
• Lack of external funding implied a sharper contraction of domestic absorption than that predicted in the plan,
aggravating the recession
• The following table presents the IMF estimates of savings and investment as of June 2011, compared with the revised figures at the time of the 8th/9th review, in 2013.
Centre for European Policy Studies •
www.ceps.eu 57
Portugal
Centre for European Policy Studies •
www.ceps.eu 58
Portugal 2011 2012 2013 Sum
Plan(June2011)
GDPnominal 170.6 169.8 174
Privatesavings 18.9 21.7 25.9 66.6
Governmentsavings -5.6 -4.1 -2.3 -12.0
Investment 30.7 29.0 30.1 89.8
Currentaccount -15.4 -11.4 -7.1 -33.9
Reality(October2013)
GDPnominal 171.1 165.1 165.3
Privatesavings 27.7 32.7 32.7 93.1
Governmentsavings -8.4 -8.4 -6.6 -23.4
Investment 31.5 27.6 24.5 83.5
Currentaccount -12.0 -2.5 1.7 -12.8
Difference
GDP(%diff) 0% -3% -5%
Privatesavings 8.8 11.0 6.8 26.5
Governmentsavings -2.8 -4.3 -4.4 -11.4
Investment 0.8 -1.5 -5.6 -6.3
Currentaccount 3.4 8.9 8.8 21.1
All in all
- a sharper than expected contraction in foreign lending - Plus a larger than expected government deficits
…. translated into a huge crowding out of private investment and consumption.
• Not surprisingly, nominal GDP fell more than expected
• In June 2011, the IMF estimated the current account to reach a deficit of €7.1bn in 2013, but the reality was a €1.7bn surplus.
• Along 2011-2013, the cumulative forecasting error in the CA
amounted to €21.1bn.
• At the same time, government savings underperformed relative to the initial plan by
some €11.4bn, cumulative (this figure does not include SOEs outside the budget perimeter).
Achievements
Achievements
• Fiscal adjustment
– Though slower than planned
• Current account adjustment
– Faster than planned
• Improvement in NIIP
• Return to markets
– Jan 2013: Portugal successfully floats a 5-year (syndicated) bond – April 2014: 10-year bond
-130 -120 -110 -100 -90 -80 -70 -60
2005Q1 2006Q3 2008Q1 2009Q3 2011Q1 2012Q3 2014Q1 2015Q3
Net International Investment
Position, Portugal
-6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0
1996 2001 2006 2011 2016
Nominal Bond-Yields
Implicit nominal interest rate Nominal GDP Growth
Portugall
• From 2009 to 2011, the NIIP increased from 107.9% of GDP to -100.7%.
• In 2010-11, however, the current account deficits accumulated 20%.
• So, roughly 27p.p. of the change in NIIP was explained by capital gains.
• Along 2011-2012 the reverse has occurred: the CA deficit was 6% of GDP and the NIIP deteriorated by 16p.p. So, there was a valuation change amounting to -10p.p.
• The valuation changes were related to changes in the market
perception regarding the Portuguese credit risk, which impacted on the price of government and corporate bonds
2008 2009 2010 2011 2012
Current Account
% of GDP-12.1 -10.4 -10.1 -6.0 -1.8
Net International Investment Position
% of GDP-95.1 -107.9 -104.3 -100.7 -116.5
Fiscal achievements
• Debt started to decrease in 2014
• Most of the adjustment was achieved through revenues (2/3 rather than 1/3)
• Horizontal expenditure cuts
– No differentiation according to merit
• Expenditure repression rather than expenditure elimination
– Pressures for reversals after the bailout
• Public administration
– Merges, transfers of workers
• Entropy, no significant savings (demotivation)
• Fiscal devaluation failed
58.3 59.5 55.2
51.8 51.0 50.3 53.4 56.2 58.7 62.0 67.4 69.2 68.4 71.7 83.6
96.2 111.4
126.2 129.0 130.6 128.8 129.2 124.8 121.5
0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0
1995 1996
1997 1998
1999 2000
2001 2002
2003 2004
2005 2006
2007 2008
2009 2010
2011 2012
2013 2014
2015 2016
2017 2018 Government debt (% of GDP)
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Overdue credit (households) Overdue credit (NF corporations)
Banks
• Liquidity problem accommodated by LTRO
• Still, banks were lacking capital
– Tighter capital requirements, imparities – No conditions to raise capital in the market
Strong deleveraging
• 2012:
– Recap of BPI and BCP (CoCos, funded by the backstop)
– Recap of CGD (funded by the budget) – Loan-to-deposit ratios declined
– Banks slowly returned to debt markets
• Still:
– High levels of NPL
– Failures of BES and BANIF after the programme reveal weak supervision
80.0 130.0
180.0 Loans to deposits ratio
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Título do Gráfico
ECB loans/Liabillities % of asset Funding from other banks % of asset.
Liabilities of Portuguese banks
Structural reforms
Product markets
– New competition law
– New framework law for regulators (more independence) – Privatisation of ANA, EDP, REN, CTT, TAP
• Revenue concerns came at the cost of competition
• Privatization of TAP was partly reversed
– New regime for house leases
However:
– By-laws for 18 regulated professions postponed
– Failure in tackling rents in electricity (feed-in tariffs)
– PPP contracts renegotiated at the cost of less investment
– More favourable labour contracts in ports translated into higher rents, rather than passing-through consumers (markups increased in general)
Structural reforms
Structural reforms
• Labour market
– Individual Bank of hours – Lower severance pay
– Reduction in the maximum duration of unemployment benefits to 18 months
• However:
– Extensions of collective agreements to non-participating firms were back at the end of the programme
– No progress on individual dismissals
• OECD indicator: Portugal remains in the last position
Unit 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Strictness of employment protection
Strictness of empl. Protection - Individual Rank/34 34 34 34 34 34 34 NA NA NA NA NA
Strictness of empl. Protection - Collective Rank/32 7 7 6 6 6 6 NA NA NA NA NA
Product Market Regulation
Product Market regulation Rank/29 24 NA NA NA NA 11 NA NA NA NA NA
State Control Rank/29 26 NA NA NA NA 19 NA NA NA NA NA
Barriers to entrepreneurship Rank/29 17 NA NA NA NA 7 NA NA NA NA NA
Barriers to trade and investment Rank/29 8 NA NA NA NA 11 NA NA NA NA NA
Ease of Doing Business
Ranking doing business Rank/174 NA NA 32 27 28 27 29 24 25 27 29
Starting a business Rank/174 29 27 33 36 24 25 18 34 37 42 47
Dealing with construction permits Rank/174 124 132 120 94 70 36 35 34 35 39 42
Getting electricity Rank/174 NA NA 84 84 96 90 94 94 99 96 100
Registering property Rank/174 73 73 61 23 23 21 23 23 24 24 25
Getting credit Rank/174 74 81 88 91 94 97 98 85 91 96 101
Protecting minority investors Rank/174 39 44 44 49 52 49 46 49 51 52 55
Paying taxes Rank/174 46 51 57 49 50 50 50 57 56 42 53
Trading across borders Rank/174 23 26 26 26 27 23 28 29 15 15 15
Enforcing contracts Rank/174 61 54 30 30 31 31 27 28 19 19 18
Resolving insolvency Rank/174 20 21 21 22 24 22 22 32 31 30 35
60 70 80 90 100 110 120 130 140 150 160
1995 2000 2005 2010 2015
Employment - Agricultures
Employment - Building and construction Employment - Services
Employment - Manufacturing industry
Pós-troika O emprego nos serviços cresceu mais do que nas manufacturas
2007 2013
2013
80.0 85.0 90.0 95.0 100.0 105.0 110.0 115.0 120.0 125.0
70.0 75.0 80.0 85.0 90.0 95.0 100.0 105.0
Exports(Volume)
TotalEmployment
Exportsofgoodsvsemploymentinmanufacturesandagriculture (2007=100)
Portugal Greece Ireland Italy Spain
exports of “goods” vs employment in “agriculture” plus “manufactures” (2007-2013)
Exports of goods have recovered in GIPS
In Greece they already surpassed the 2007 level
But, by 2013, employment in manufactures and in agriculture did not increase
(Except in Ireland)
1999 2001
2004 2008
2014
1992 1992 2001 2009
2004
1996 2014
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
-20% -15% -10% -5% 0% 5% 10%
Realexchangerategap
Output gap
Output gap and RER gap
• In both countries expenditure
reducing polices dominated
expenditure
switching
A TCR em ULC desvalorizou, mas em P não.
Ou seja, os markups aumentaram
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Real GDP growth % ch 2.5 0.2 -3.0 1.9 -1.8 -4.0 -1.1 0.9 1.8 1.9 2.8 2.2
Relative to rest of EU 15 % ch -0.6 -0.3 1.3 0.0 -3.2 -3.3 -1.0 -0.7 -0.5 -0.2 0.4 0.1
GNI at current PPS per head of Population PPS, EU=100 70.3 70.1 71.4 71.6 68.6 66.7 68.9 69.0 68.8 70.0 70.0 70.7
TFP Growth % ch 1.6 -0.8 -1.8 2.4 -0.7 -1.2 1.0 0.3 1.2 1.1 0.8 0.8
Output Gap % 1.3 0.9 (1.9) 0.0 (1.2) (3.9) (4.1) (3.1) (1.7) (0.7) 0.7 1.2
Employment % ch 0.3 0.5 -2.9 -1.4 -2.3 -4.0 -2.7 1.5 1.2 1.5 3.4 2.2
Unemployment rate % 9.1 8.8 10.7 12.0 12.9 15.8 16.4 14.1 12.6 11.2 9.0 7.1
Of which: Share of Long-term % 47.3 44.2 47.8 52.4 47.4 51.2 58.0 59.3 56.8 55.2 46.5 40.6
GDP deflator % change 3.0 1.7 1.1 0.6 -0.3 -0.4 2.3 0.8 2.0 1.8 1.5 1.4
CPI inflation % change 2.4 2.7 -0.9 1.4 3.6 2.8 0.4 -0.2 0.5 0.6 1.6 1.5
Nominal compensation per employee % ch 3.5 2.6 2.4 2.1 -1.8 -3.1 3.6 -1.8 0.4 1.7 1.6 1.8
Nominal ULC (total economy) % ch 1.0 2.8 2.7 -1.2 -2.0 -3.2 1.8 -1.3 0.0 1.4 2.1 1.8
RER ULC (relative to EU15) 1995=100 113 113 113 112 109 104 105 103 102 104 106 106
Exports of goods and services % ch 7.3 -0.3 -10.2 9.5 7.0 3.4 7.0 4.3 6.1 4.4 7.8 5.5
Imports of goods and services % ch 5.4 2.5 -9.9 7.8 -5.8 -6.3 4.7 7.8 8.5 4.7 8.1 6.0
Current Account % of GDP -9.7 -12.1 -10.4 -10.1 -6.0 -1.8 1.6 0.1 0.1 0.6 0.5 0.2
Households savings rate % disp. Inc. 7.0 6.8 10.4 9.2 7.5 7.7 7.8 5.2 5.3 5.0 4.7 4.6
Gross Fixed Capital Formation % of GDP 22.5 22.8 21.1 20.5 18.4 15.8 14.8 15.0 15.5 15.5 16.7 17.1
Gen. Government: net lending % of GDP -3.0 -3.8 -9.8 -11.2 -7.4 -5.7 -4.8 -7.2 -4.4 -2.0 -3.0 -0.7
Gen. government primary balance (cycl.adj.) % pot. GDP -0.7 -1.1 -5.9 -8.3 -2.5 1.2 2.1 -0.7 1.0 2.5 0.5 2.1 Gen. government structural balance (cycl. adj.) % pot. GDP NA NA NA -8.5 -6.7 -3.6 -3.0 -1.8 -2.3 -2.1 -1.3 -0.9
(diff. relative to previous year) % pot. GDP NA NA NA NA 1.8 3.0 0.6 1.3 (0.5) 0.2 0.8 0.4
Gen. government prim. struct. balance (cycl. adj.) % pot. GDP NA NA NA -5.6 -2.3 1.3 1.8 3.1 2.3 2.1 2.5 2.5
(diff. relative to previous year) % pot. GDP NA NA NA NA 3.2 3.6 0.6 1.3 (0.9) (0.2) 0.4 (0.0)
Private sector debt, consolidated (MIP) % of GDP 185.0 196.2 204.2 201.5 204.1 210.3 202.4 190.5 179.4 170.3 163.5 NA Gen. government consolidated gross debt % of GDP 68.4 71.7 83.6 96.2 111.4 126.2 129.0 130.6 128.8 129.2 124.8 121.5
Government bond yields % 4.4 4.5 4.2 5.4 10.2 10.6 6.3 3.8 2.4 3.2 3.1 NA
Implicit int. Rate on gov. Debt % 4.5 4.6 4.1 3.6 4.4 4.2 3.9 3.9 3.6 3.4 3.1 NA
Net International Investment Position % of GDP -88.8 -95.1 -107.9 -104.3 -100.7 -116.5 -116.3 -118.6 -113.2 -106.1 -105.7 NA
Loans to deposits ratio 160.1 160.3 161.5 157.8 140.2 127.9 111.8 102.1 96.1 95.3 94.0 NA
Overdue credit (households) %, e.o.p. 1.7 2.2 2.7 2.8 3.3 3.8 4 4.3 4.2 3.7 3.8 NA
Overdue credit (NF corporations) %, e.o.p. 1.5 2.2 3.9 4.1 6.0 9.4 11.8 14.2 15.2 15.0 12.7 NA
ECB loans/Liabillities % of asset 1.3 3.0 3.8 9.3 9.9 11.4 11.2 7.9 7.0 6.4 6.3 NA
Funding from other banks % of asset. 16.3 15.7 14.8 15.4 14.6 12.4 10.3 10.5 8.9 9.0 8.8 NA