Following in Portugal’s footsteps

A section of the Bank of Greece’s annual report, presented to shareholders by Governor Yannis Stournaras last week, was dedicated to reviewing how other countries exited their adjustment programs. As Greece also nears its bailout finish line, looking at the examples around it is undoubtedly a useful exercise.

It is pointed out that the other four eurozone countries which were under programs (Cyprus, Ireland, Portugal and Spain) achieved clean exits that were followed by post-program surveillance. Out of this group, Ireland was the first country to exit its program in December 2013, followed by Spain in January 2014, Portugal in June of the same year and Cyprus in March 2016.

Throughout the years of the euro crisis, Greece has been a unique case and the way it will bring down the curtain on more than eight years of bailouts will also be different to its peers. There is no single example that quite fits the Greek case given that post-program surveillance is set to be more stringent for Greece as a result of the debt relief it will receive and demanding fiscal targets will be in place until 2022.

However, Greece is increasingly looking to Portugal, which also faced a fiscal and competitiveness crisis, as an example to follow once it leaves the third memorandum of understanding (MoU). “Portugal is a very good example for us because you showed the way, not just on how to exit the memorandums, but also how to apply socially friendly policies right after the memorandums,” Prime Minister Alexis Tsipras told his Portuguese counterpart Antonio Costa during a visit to Lisbon late last year.

Labor Minister Effie Achtsioglou was the latest member of the government to visit Lisbon, where she discussed last month the SYRIZA-led coalition’s plans to re-establish collective wage bargaining and increasing the minimum wage with Portuguese officials.

When Portugal announced in 2014 that it was exiting its program without a precautionary credit line, it did so without completing the final review and eschewed the last bailout installment. Within roughly three years, and under a Socialist-led coalition, Portugal had reduced its budget deficit to a 40-year low, halved its unemployment rate and experienced its strongest growth in more than a decade.

This turnaround was all the more notable because after Costa became prime minister in November 2015, his three-party government (known as the “geringonca,” or contraption), reversed some of the previous austerity measures, including cuts to pensions and public sector salaries. The inclusion of its sovereign bonds in the European Central Bank’s quantitative easing (QE) scheme also helped.

Ricardo Cabral, an assistant professor of Economics at the University of Madeira, points out that Portugal had also been running consecutive trade balance, current and capital account surpluses since 2012, giving the country a springboard to grow once the bailout ended. Speaking to Kathimerini English Edition, he identifies the main factors in Portugal’s economic recovery as “recurring current and capital account surpluses, which allowed budgetary policy to be a little less restrictive.”

“Nominal cuts to public sector wages and pensions were gradually reversed and no new austerity measures were imposed,” he adds when listing the factors worth noting.

Cabral also explains that Costa’s Socialist Party took advice from a group of economists on how to comply with the eurozone’s Fiscal Compact to the letter and, in this way, find small amounts that could then be redistributed via spending policies. He contrasts this with the previous center-right government, which exceeded the fiscal targets, leaving it no room for redistribution.

“The key contribution of this left coalition government was to resist the immense pressure of the European authorities to adopt stricter budget deficit targets and to resist the urge to adopt new austerity measures,” adds the Portuguese economist.

Joao Silvestre, a journalist reporting on economic and financial issues for Portuguese newspaper Expresso, highlights the role played by the Portuguese Treasury and Debt Management Agency (IGCP) in paving the way for the country to make a successful exit from the program. IGCP oversaw a return to the markets in January 2013, before the end of the bailout, and long before Portuguese bonds were included in the ECB’s QE scheme.

“IGCP was able to tap gradually the markets and attract investors from different origins with a very intelligent and diligent work: road shows, presentations etc,” says Silvestre. “Given the fact that Portugal was still under a troika program and with junk status, this was not an easy job.”

The extra element to this strategy was that the tapping of the markets helped Lisbon build a cash buffer, which by the end of 2013, almost six months before it exited the program, exceeded 15 billion euros. This was enough to cover Portugal’s net financing needs for the next 12 months.

All these factors came together, along with a boost for exports and tourism, to create a completely different atmosphere for Portugal. Sentiment improved to the extent that the dark days of the bailout were banished, making it an excellent example for Greece to look to.

However, what is also clear in Portugal’s case was that there was no silver bullet. Instead it was a case of wise management, creative thinking, good timing and bold decision-making. It is important that Greek decision-makers and voters understand this and do not fall into the trap of thinking that because Portugal made a success of its departure from the bailout, it will automatically be the case for Greece. Equally, they need to appreciate that once the MoU reaches its conclusion, another test will begin.

“Just try to stabilize the economy by creating some certainty about the future,” says Cabral. “Reverse cuts to wages and pensions, if possible. Seek to reduce interest outlays on public debt, namely by restructuring. Focus on the impact of policy measures on the current and capital account balances and attempt to keep balanced current and capital accounts.”

“I think the most important for Greece, right now, is to build a cash buffer and stick to fiscal targets,” says Silvestre. “These two things – along with a political commitment to recovery, structural reforms etc – are crucial to put the economy on a path to normality with access to international capital markets. After that, of course, it is urgent to deal with all of the social and economic problems after all these years of crisis.”