The IMF on Portugal: Reading between the lines.


Having watched the IMF on Portugal, Greece, and Ireland, one thing sticks out.

It doesn’t matter how much money is pumped into these countries, their future is not guaranteed.

The IMF are obviously much more on the ball, when it comes to indebted countries and restructuring, than their senior Troika partners, and because the IMF have no need to focus on the maintenance of the Euro or Euro-zone (other than considering how this problems of this currency will affect the global macro picture) we see a much more honest approach from their technocrats, than we do from those employed by the EU.

In the IMF presentation, they managed to clearly illustrate the different causes of economic stress in each country, from the horrendously bad fiscal management in Greece, to the Irish situation, which was primarily a banking crisis which was passed on to the state. Portugal it appears is a mixture of the two.

Although not said, Greece is expected to remain a burden for at least the next 15 to 20-years: a black-hole which will not survive without massive injections of EU funding. It lacks the ability to be competitive in Europe and globally, and under normal conditions would need to devalue its currency; something it cannot do, as it is trapped within the Euro-zone.

With Portugal, the IMF appeared relatively happy with the actions being taken by the government, yet they want to see an increase in austerity measures. The main concern for Portugal is that it is heavily reliant and exposed to external pressures, which it cannot control. i.e. increased Austerity in the EU, especially Spain.

On a positive note, it was mentioned that Portugal’s exports to “Lusaphone” countries had increased, and this was extremely welcome and should be developed at all costs.

Unlike the blind focus of the EU on debt repayment, the IMF also focused on the need to restructure in order for the countries to become competitive. And they were not frightened to graphically indicate how much Germany had benefitted from Euro-membership though having an “artificially” weak currency, and how much Greece, Portugal, Italy, and Spain had suffered, because in relative terms the Euro was to strong for their economies..

The IMF stated clearly that, north European lenders needed to take a large share of the responsibility for the economic collapse in southern Europe, because their lending had been “reckless” and also the EU’s northern leadership had taken far too long to address the problems of these southern countries, when they had first become apparent.

Banking “Greed” was cited, not only as a major reason why the debts became so large, but also that banks were acting as a stumbling block to any recovery. Difficult to get, expensive loans were curtailing competitiveness and growth, and lack of lending is severely damaging overall liquidity.

The EU did not come out of this unscathed.

As mentioned, “speed of reaction” in Brussels was clearly an issue, and the failure of the north to sacrifice for the south in a timely manner did not go unmentioned. Yet it was clearly stated that the EU was now “willing to spend whatever was necessary” to keep the Union and its currency together – Although the IMF did fail to high-light that this was tax-payers money.

As much as the IMF attempted to “weave” a positive spin into their message, their concerns were many and they were not able to “gloss-over” their underlying concerns, that the road to recovery for these countries remained precarious.

It was made apparently clear that the IMF, were not “comfortable” attempting to find solutions for these countries, because “being “locked” into a currency union”, took away some of the main tools that the IMF would normally utilise to help solve debt problems and competitive disparities. However, they seemed obligated to join the “Troika” to give it some global legitimacy, and also because of the problems a bankrupt Europe would undoubtedly have on the rest of the world.

The graphics used in this IMF presentation, revealed that Portugal’s problems started in 1995 (which supports many people’s opinion on the “culpability” of then Prime Minister, Cavaco Silva) and revealed that the problems started to surface around 2001, when Portuguese goods became uncompetitive, due mainly to the unjustified increases in labour costs caused by Euro-zone membership at a time when GDP dropped. The Portuguese, overly-protective rules concerning employment were mentioned.

Political “games” and favouritism were hinted at, and there was strong condemnation of how inadequate the state-machine operated when it came to collecting tax revenue.

Long term austerity measures were forecast for the foreseeable future and beyond, and the IMF did not dismiss that this austerity was going to stifle growth-potential, because of its massive affect on domestic purchasing power.

The Conclusion

Whilst debts needed to be serviced, public spending needed to be cut further, and with a lack of investment capital available, high levels of unemployment were going to become the norm.

International investors would not be attracted back to Portugal for at least another 4 or 5-years, as they would need to see a “long period” of stability and we have not reached stability levels yet. (Although, investors from “Portuguese-speaking” countries had been noticeably active)

With Portuguese banks currently “impudent”, the only course to stability was through increasing current  exports by being more competitive; and to be more competitive globally– without the ability to weaken the currency – real salaries need to decrease some 15% over the coming years.

Portugal’s future lies in its relationships with the ex-colonies of Africa and South America, “commodity producing” countries who will clearly need more services provided in their own language, as well as certain Portuguese made goods.

However, the main risk for Portugal is Political.

The path to growth is along a knife edge and any mistakes along the way could prove extremely costly.

There is obviously a major risk of national politicians returning to operate in a blatantly “nepotistic” way: The left giving too much to union member’s, or the right offering beneficial deals to “crony” businessmen.

But there is also the major risk that the European Union would make decisions against the interest of Portugal. Basically bringing in rules and regulations which would damage Portugal, sacrificing it growth potential, because the EU deem it more important to protect the Union as a whole ( i.e. Germany and France).

We should not ignore the fact that the IMF itself is not above political games and everyone has an “agenda”. But there did seem to be an element of honesty from this body in their presentation: definitely more than we get from Lisbon, Brussels, or Frankfurt.


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