Once Poorer and Needing Aid, Portugal Leaves Drama to Greeks

Winning Through Austerity
  • Premier Coelho seeks re-election on Oct. 4 and leads polls
  • Unemployment is dropping, though debt still looms over economy

When German Finance Minister Wolfgang Schaeuble looks for “proof” that the euro region has the right strategy for tackling its debt crisis, he points to Portugal: The bailed-out nation is taking its medicine and recovering.

Greek politicians might tell you that kudos from the Germans doesn’t always reflect support at home when your country is the clamp of austerity. But in Portugal, there’s a reluctance to rock the boat as voters cast their verdict on Prime Minister Pedro Passos Coelho’s stewardship of a rescue program that is starting to pay off even if debt remains high.

Pedro Passos Coelho delivers a speech during a political rally ahead of the election in Braga.
Pedro Passos Coelho delivers a speech during a political rally ahead of the election in Braga.
Photographer: Paulo Duartes/Bloomberg

“The Portuguese are more resigned, but more resilient,” said Paulo Sande, a professor at the Institute for Political Studies at Lisbon’s Catholic University. “It has more to do with the people rather than with the political system. Portugal played by the rules of the game.”

Politics in the euro region all of a sudden seems less disruptive. Two weeks after Greece re-elected a leadership that had opposed spending cuts only to capitulate, Portugal’s election on Sunday looks even more subdued. A Bloomberg poll of investors suggests the bond market will barely move regardless of who wins after rallying over the past two years.

The Survivors

Coelho’s coalition is the first to survive a full term in Portugal since the Estado Novo dictatorship ended in 1974. While turnout may be among the lowest since then, opinion polls show voters are willing to stick with the government that imposed cuts and tax increases in a country that was poorer than Greece until last year, based on economic output per person compiled by Eurostat.

The Social Democrats and governing partner, the CDS party, now face the Socialists in Sunday’s election with both sides pledging to keep cutting the country’s still eye-watering debt after it gorged on cheaper financing following euro membership.
The European Commission estimates debt next year will still exceed 120 percent of the economy, which is now at least growing at 1.6 percent a year after exiting recession in 2013. Unemployment is about 13 percent, above the euro region average though lower than the 22 percent in neighboring Spain.

Coelho, 51, aims to increase exports so they make up more than half the economy by 2020 from 40 percent now, while trimming the budget shortfall further. Socialist leader Antonio Costa, 54, wants to bolster family incomes and narrow the deficit at a slower pace, though not by following the confrontational approach of Greek Prime Minister Alexis Tsipras.

Making Sacrifices

Compared with Greece and Ireland, the good times in Portugal were less heady and the collapse less catastrophic. Portugal had the lowest GDP per capita among the 12 initial members of the euro, according to Eurostat. Then-finance minister Vitor Gaspar in April 2013 described Portugal as having had a “bust without a boom.”

The message from Coelho is that the hard work is done. “The sacrifices made weren’t in vain,” he told a rally on Monday in Bombarral, north of Lisbon, as green-and-red Portuguese flags and coalition banners flew.

It’s playing well in the polls. The Social Democrat coalition was ahead of the Socialists by at least four percentage points over the past week. The most recent one by the Catholic University put the gap at 38 percent to 32 percent.

“The sustained improvement in economic conditions is undoubtedly favoring the ruling coalition, who can point to the success of its economic policy, largely aligned with the requirements of Portugal’s rescue program,” Federico Santi, an associate at Eurasia Group, said in a Sept. 23 report.

ECB Support

Coelho took over from the Socialist minority government that in April 2011 followed Greece and Ireland by requesting a bailout from Europe and the International Monetary Fund. Portugal sold assets, raised taxes on everything from wages to diesel cars and reduced spending by 11 billion euros ($12.3 billion).

It exited the program in May 2014 and has taken advantage of falling borrowing costs supported by the European Central Bank, even while the country remains rated below investment grade.

Portuguese 10-year bonds yield 2.36 percent after reaching 1.509 percent on March 12, the lowest since Bloomberg began collecting data in 1997. The yield then rose to as much as 3.39 percent in June as Greece clashed with creditors, before declining by a percentage point ahead of Sunday’s election.

“I don’t think the Portuguese will vote according to promises or wish lists,” Economy Minister Antonio Pires de Lima, from junior coalition partner CDS, said in an interview on Aug. 14. “This government has proven it put the country on the right track and in the end there will be some recognition by the Portuguese people of that fact.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE