Portugal passes its latest troika review in line with the 1st Iron Law of the Eurocrisis— when it gets serious, you have to lie.
According to the troika, Portugal is on a path of deficit reduction and will be able to reenter international debt markets next year. This is a
dishonest optimistic analysis of the data.
In order to proclaim that Portugal’s program is on track, the troika made several rosy assumptions. They believe that Portugal’s economy will only shrink by 1% next year and return to growth by 2014 and will able to reduce its budget deficit in the midst of an economic depression.
The country will never attain these goals. Spain, its largest trading partner is imploding. Additionally, the country plans €2bn per year in additional spending cuts; this figure alone will lop off 1% per year off its €186bn GDP, not even accounting for the multiplier effect.
Since the economy will shrink more than forecast, the government budget will not attain its revenue goals and miss the 4.5% budget deficit for 2013. Of course, this does not stop Ollie Rehn from opening his mouth:
Confidence in Portugal’s prospects continues to grow, both among its institutional partners and market participants…This bodes well for Portugal’s full return to market financing.
Allow me to remind you of the 2nd Iron Law of the Eurocrisis— ignore whatever the politicians have to say, and focus on the numbers.
These are the important numbers, Portugal’s Government Debt to GDP:
The ratio has been steadily rising for years. While the rate of increase is projected to slow during the next two years, adding two more annual 5% budget deficits means that Portugal will approach a 120% debt to GDP ratio.
Mind you, that is the best case scenario. A more realistic two 7% budget deficits blows through the 120% barrier. Just like Greece, there is no way this small, relatively poor country will ever be able to pay back this debt.
Sometime within the next two years, Portugal will need to renegotiate this bailout, just like Greece is doing now; just like Greece, Portugal will eventually default on its debt.