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The Portuguese Economy: An Earthquake In Lisbon

portuguese economy

portuguese economyThe Portuguese Economy’s encouraging spell of  news came to a crashing halt in early July, as doubts grew about the  government’s ability to enforce a series of austerity measures that had been agreed with the European Commission, the European Central Bank and the International Monetary Fund (the “troika”)

A spate of street rioting against the cuts followed on from the resignation of Finance Minister Vitor Gaspar – and also of Foreign Minister Paulo Portas, who heads the junior partner in the coalition government, the Popular Party. The resignations were felt to endanger the government of Prime Minister Pedro Passos Coelho, who now faced the daunting task of imposing the austerity measures with a minority government.

Then again, he might not. But that wasn’t good enough for the money markets, which pounded Portugal’s government bonds, raising benchmark yields by as much as 200 points and taking the ten-year yield above 8%. Earlier this year, the Lisbon government had been cheered by the successful auction of another round of bonds that had suggested everything was going fine.

The issue here is not just that the Portuguese economy had been bailed out in May 2011, to the tune of €78 billion euros (£67 billion), and that the markets needed to feel confident of its ability to pay that money back. It is also that Portugal is widely seen as a bellwether for the other indebted Mediterranean countries, including Greece, Spain and even Italy, which has so far required no bailouts. Spanish and Italian bonds, which had been doing quite well until that point, suffered abrupt rises of up to 100 points in their bond yields, and the stock markets of both countries took a juddering hit.

The uncertainty was enough to send equity values spiralling downward throughout Europe – unlike in the United States, where they remained firm throughout.

 

 

 

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