Bailout ends but austerity stays for Portugal

By Barry Hatton

Associated Press

Published: Friday, May 16 2014 7:54 a.m. MDT

In this photo taken on May 15, 2014, a fishmonger checks sales as she waits for customers at Lisbon's Ribeira market. A thousand days on from its near-economic collapse, Portugal is ready to stand on its own again. On Saturday, May 17, 2014, after an internationally-mandated makeover, Portugal will become the second euro country, after Ireland, to officially shake off its bailout shackles.

Francisco Seco, Associated Press

LISBON, Portugal — A thousand days on from its near-economic collapse, Portugal is ready to stand on its own again and is promising not to go back to its bad old spend-happy ways.

On Saturday, after an internationally-mandated makeover, Portugal will become the second country that uses the euro as its currency, after Ireland, to officially shake off its bailout shackles.

Three years ago as the debt crisis fires were engulfing Europe and threatening to derail the whole euro currency project, Portugal's government was down to its last 300 million euros ($413 million) and facing the imminent prospect of bankruptcy.

To avoid that ignominy, sclerotic Portugal — like overspending Greece and overleveraged Ireland before it — asked and got an emergency financial rescue package from its European partners and the International Monetary Fund.

As with Athens and Dublin, the 78 billion euro bailout came at a price: Lisbon had to submit to a three-year program of deep spending cuts and reforms that stripped away welfare and labor entitlements.

Now, unlike Greece which had to negotiate a second bailout, the Portuguese government says it doesn't need any more help because investors have shown an appetite to lend money to the country at an affordable rate.

Despite a 0.7 percent quarterly contraction in the first three months of the year that the Portuguese government blamed on production stoppages at major exporting factories, Portugal's economy has shown signs of life too over the past year or so.

Its recovery is seen by European political leaders as evidence that the much-maligned austerity prescription was the right medicine for the country's ills. For many Portuguese, though, the success has come at an unacceptable price and the straitened times are set to continue.

Why is Portugal able to stand on its own feet?

Portugal last month breathed a sigh of relief when investors demonstrated renewed faith in the country's prospects when flocking to its first sale of long-term government debt since the crisis erupted.

Though the 750 million euros raised was relatively minimal, the ease at which the auction was conducted stood in marked contrast to the prevailing environment in the early part of 2011, when investors wouldn't touch Portugal's debt offerings with a 10-foot pole. Paying only around 3.6 percent is manageable, certainly when compared with the near 17 percent or so investors wanted three years ago.

"The main goal of the bailout program — to get reasonably-priced financing from markets — has been accomplished," said Alvaro Almeida of Porto University's Economics Faculty.

A key step in meeting that target was reducing the budget deficit — the amount the country spends beyond how much it receives in taxes and other revenue. At the end of 2013, that was down at 4.9 percent of the country's annual gross domestic product against 10.1 percent three years earlier.

Growth has also resumed after a three-year recession that sent unemployment sky-rocketing, particularly among the young. The IMF is predicting growth of 1.2 percent this year, just shy of the average in the 28-country European Union average of 1.6 percent.

What's pleasing many, particularly those that advocated the austerity program, has been the unexpected improvement in the country's exports, which rose by 27 percent between 2010 and 2013. Foreign sales by the traditional footwear and textile industries grew 40 percent and 11 percent respectively over the same period as companies belatedly modernized.

One of the purposes behind the austerity program was to make goods and services more competitive in international markets.

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