The International Monetary Fund is ready to provide Portugal with €26B, with €6B of it being provided instantly. In 3 years Portugal will get a total of €78B. Thus year Lisbon will get € 12.6B from the IMF and € 25.5B from the ECB.
The financial aid became possible after the Portuguese authorities agreed to implement a series of structural reforms, including a healthcare reform and mass privatization. The IMF’s experts believe that the reforms will help Portugal to regain the competitiveness of its economy and to stabilize its financial sector while the loans provided by the EU and the IMF will make up for the pension and social-benefit cuts.
Portugal has become the 3rd EU country to ask for external financial aid in order to overcome the consequences of the global financial crisis. However there are some differences between the Portuguese debt problem and the Greek/Irish debt problems, experts say.
How did Portugal reach rock bottom?
According to the mentioned experts of , the global crisis affected Portugal more than any other Euro-zone country. Here is chronology of Portugal ’s decline:
· Portugal was the last Euro-zone member to face the crisis. It happened in early 2009 after the publication of the GDP data for Q4 2008 (a 1.6% decline).
· The EU authorities were waiting for the Portuguese government to ask for help since autumn 2010. All that time Portugal was trying to cope with the crisis on its own by introducing an austerity program.
· However the steps proved to be insufficient – the budget deficit in 2010 reached 8.6% instead of expected 7.3%.
· In March 2011 Moody’s was constantly decreasing Portugal ’s credit rating.
· In effort to salvage the situation Jose Socrates’ government introduced to the Portuguese parliament a new package of anti-crisis measures - unemployment benefit cuts, tax hikes, an increase in transport fees etc – in order to reduce the budget deficit down to 4.6%. However the parliamentarians refused to approve the anti-crisis package and Jose Socrates had to resign. A political crisis was added to the economic one, which wasn’t seen in Ireland and Greece.
· At this point, Portugal ’s sovereign debt is equal to 93% of the national GDP (or €160B).
· According to the Portuguese Minister of Finance, in 2011 the GDP is expected to decline by 2% (which is twice as much as it was expected in early 2011). In 2012 the GDP is believed to decline by 2% as well. Only in 2013 the country’s economy will be able to start recovering.
Is Euro to be blamed for Portugal ’s crisis?
Margarita Marquez, the head of the Representation of the European Commission in Portugal , assumes that the crisis in Portugal is of different nature than in Greece and Ireland. Lisbon, as opposed to Athens and Dublin, didn’t make any gross mistakes in the financial sector. Portugal failed to come out of the crisis because the lending conditions in the international arena changed for the worse.
Many Portuguese blame the common currency for the country’s economic problems:
· In the 1990s the pace of Portugal ’s economic growth was one of the highest in the EU (3.4%). By the end of the 20th century Portugal was Europe’s 15th economy.
· After entering the Euro zone in 2002 the country fell into continuous stagnation. Numerous experts considered Portugal ’s economy sick long before the global crisis.
· Until the crisis the pace of its GDP growth didn’t exceed 1%
· The expensive Euro currency scares tourists away while Portugal ’s tourist industry makes 6% of the GDP.
· The textile industry has recently fallen into stagnation as well. It employs over 20% of the working population and used to make up 11% of the country’s export.
· Over the last decade Portugal has seen continuous external trade deficit. The country’s manufacturing industry makes up only 25% of the national GDP that is why it depends on industrial imports.
· The unemployment rate has hit the absolute record of 10.9%.
The experts of note that Portugal is the only EU state that has exceeded the budget deficit limit for 3 times.
In order to come out of the crisis the Portuguese will have to introduce extremely tough austerity measures:
· Public sector salary cuts by 10%
· Healthcare spending cuts
· Social benefit cuts
· Pension freeze (plus, pensions over €500 will taxable)
· The income tax will be increased up to 45% (50% for bankers)
· The corporate tax will be raised from 25% up to 27,5%
· Big-scale privatization of the country’s industrial facilities (over €1 trillion)
Does the “domino effect” threaten the Euro zone?
The Euro zone’s destiny raises more and more concerns:
· The list of the Euro-zone countries, which may need external financial aid, is rather long. Out of the so-called PIIGS list (Portugal , Italy, Ireland, Greece and Spain) 3 countries have already gone cap in hand to the ECB and the IMF. Is it time for Italy and Spain to join the company?
· Belgium well may be put on the same list. This year its sovereign debt is expected to exceed 100% of the GDP, with the real budget deficit being equal to 5% for 2011. The unemployment level is 8.5%. The inflation rate in April was 3.41% (y/y). The situation is aggravated by the political crisis: Belgium has already been living without a government for a year.
· According to the IMF, there is a real threat of the crisis spreading over some other Euro-zone states.
· The IMF’s representatives say that Greece keeps postponing the reform of its financial system, which has a negative impact on the budget deficit reduction.
· Despite all the reassuring statements made by the Greek authorities, nobody doubts that in the near future Athens will ask for the restructuring of the loans the Greece got as financial aid.
The Dutch Minister of Finance Jan Kees de Jager assumes that if Greece collapses and leaves the Euro zone, it will definitely cause the “domino effect” while Athens won’t ever be able to repay its debts.
However, there is no procedure of leaving the Euro zone. That is why there is a serious threat that the economic collapse of at least one Euro-zone member can provoke a real financial chaos in the EU and around the word.
The professional traders from the Department of studying Masterforex-V TS , note that the index of EUR is worth paying attention to:
· The index has just suspended its movement at 38% н8. Wave а(С)/shortened С from 2.2954 is completed
· Wave b(C ) is actual until the pivot at 2.300 is broken. Below the pivot the price will start a reversal downward wave (wave A).
Market Leader and offer you to participate in a survey. Just visit the Academy’s forum for traders and investors and answer the following question:
Will the IMF’s loans save the Euro currency?
· Yes, they will
· No, they won’t
