PORTUGAL IN THE EURO-CRISIS

Ricardo ReisColumbia University and LSE

IOEB - Dakolias familyAthens, 21st of April 2016

1

CAPITAL, FLOWING

2

-12.00

-10.00

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

199619971998199920002001200220032004200520062007200820092010201120122013 Portugal

Greece

Ireland

Italy

Spain

Current account / GDP relative to 1996

Source: Reis (2016)

CORE TO PERIPHERY

3

!150000%

!100000%

!50000%

0%

50000%

100000%

150000%

200000%

1999% 2000% 2001% 2002% 2003% 2004% 2005% 2006% 2007% 2008% 2009% 2010%

Germany%

Ireland%

Greece%

Spain%

Italy%

Portugal%

Capital flows, Euros

Source: Reis (2016)

DEBT, THROUGH BANKS

4

SLUMP, NOT SO DIFFERENT

5

-0.2

-0.1

0

0.1

0.2

0.3

0.4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Portugal

Greece

Ireland

Italy

Spain

Real GDP per capita relative to 2000

Source: Reis (2016)

THE 2010-11 CRASH✴ A debt crisis

• But both sovereign and private. And ahead of sovereign, a sudden stop of private capital.

• And behind it were national banks that intermediated EA-wide credit flows

✴ A deep recession

• But roots predate crisis TFP growth stops in 2000• In common, misallocation of resources across and

within sectors.6

The troika years 2011-15

7

SUCCESS AND FAILURE

“Portugal’s reform efforts have paid off. Today’s decision by the government in Lisbon is proof of this. Portugal no longer needs European assistance and can stand on its own two feet again. This is a major success. Capital market confidence has returned, and rightly so.” June 2014.

8

In “Europe’s many disasters”“Portugal has also obediently implemented harsh austerity — and is 6 percent poorer than it used to be.”NYT, July 2015.

SUCCESS AND FAILURE

9

0"

2"

4"

6"

8"

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2010Jan"

2010Mar"

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2015Jan"

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2015Jul"

Long%term*interest*rate*

250000$

255000$

260000$

265000$

270000$

275000$

280000$

285000$

290000$

Q1+20

10$

Q2+20

10$

Q3+20

10$

Q4+20

10$

Q1+20

11$

Q2+20

11$

Q3+20

11$

Q4+20

11$

Q1+20

12$

Q2+20

12$

Q3+20

12$

Q4+20

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Q1+20

13$

Q2+20

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Q3+20

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Q4+20

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Q1+20

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Q2+20

14$

Q3+20

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Q4+20

14$

Q1+20

15$

Q2+20

15$

2010$PP$US$do

llars$

Real$GDP$

Public finances success Macroeconomy failureSource: Reis (2016)

SUCCESS AND FAILURE

10

0"

2"

4"

6"

8"

10"

12"

14"

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2010Jan"

2010Mar"

2010May"

2010Jul"

2010Sep"

2010Nov"

2011Jan"

2011Mar"

2011May"

2011Jul"

2011Sep"

2011Nov"

2012Jan"

2012Mar"

2012May"

2012Jul"

2012Sep"

2012Nov"

2013Jan"

2013Mar"

2013May"

2013Jul"

2013Sep"

2013Nov"

2014Jan"

2014Mar"

2014May"

2014Jul"

2014Sep"

2014Nov"

2015Jan"

2015Mar"

2015May"

2015Jul"

Long%term*interest*rate*

250000$

255000$

260000$

265000$

270000$

275000$

280000$

285000$

290000$

Q1+20

10$

Q2+20

10$

Q3+20

10$

Q4+20

10$

Q1+20

11$

Q2+20

11$

Q3+20

11$

Q4+20

11$

Q1+20

12$

Q2+20

12$

Q3+20

12$

Q4+20

12$

Q1+20

13$

Q2+20

13$

Q3+20

13$

Q4+20

13$

Q1+20

14$

Q2+20

14$

Q3+20

14$

Q4+20

14$

Q1+20

15$

Q2+20

15$

2010$PP$US$do

llars$

Real$GDP$

Public finances success Macroeconomy failurefailure success

1. PAYING FOR DEBTS

11

2010 2014

Trade balance -7.1% 1.1%

Exports / GDP 30% 41%

Source: Reis (2016)

1. PAYING FOR DEBTS

12

2010 2014

Trade balance -7.1% 1.1%

Exports / GDP 30% 41%

Primary surplus -8.2% 0.5%

Public Debt/GDP 96% 130%

Source: Reis (2016)

PRIMARY SURPLUS

13

!7.00%

!6.00%

!5.00%

!4.00%

!3.00%

!2.00%

!1.00%

0.00%

1.00%

2.00%

3.00%

2011% 2012% 2013% 2014%

Actual%

Source: Reis (2016)

PRIMARY SURPLUS

14

!7.00%

!6.00%

!5.00%

!4.00%

!3.00%

!2.00%

!1.00%

0.00%

1.00%

2.00%

3.00%

2011% 2012% 2013% 2014%

Actual%

Jun!11%

Source: Reis (2016)

PRIMARY SURPLUS

15

!7.00%

!6.00%

!5.00%

!4.00%

!3.00%

!2.00%

!1.00%

0.00%

1.00%

2.00%

3.00%

2011% 2012% 2013% 2014%Actual%

Jun!11%

Oct!12%

Jan!13%

Source: Reis (2016)

PRIMARY SURPLUS

16

!7.00%

!6.00%

!5.00%

!4.00%

!3.00%

!2.00%

!1.00%

0.00%

1.00%

2.00%

3.00%

2011% 2012% 2013% 2014% Actual%

Jun!11%

Oct!12%

Jan!13%

2005!08%

Source: Reis (2016)

PRIMARY SURPLUS

17

!7.00%

!6.00%

!5.00%

!4.00%

!3.00%

!2.00%

!1.00%

0.00%

1.00%

2.00%

3.00%

2011% 2012% 2013% 2014% Actual%

Jun!11%

Oct!12%

Jan!13%

2005!08%

US%11!14%

Source: Reis (2016)

SPOT THE AUSTERITY

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PORTUGAL

8 INTERNATIONAL MONETARY FUND

-12

-9

-6

-3

019

77

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Portugal: General Government Balance1

(Percent of GDP)

Sources: Haver Analytics; and IMF staff estimates.1The data for 1977-1994 are on the ESA 1995 basis.

Projection

POLICY DISCUSSIONS A. Preserving Debt Sustainability Anchored by European Commitments

12. Portugal appears to have missed the 2015 fiscal deficit target, and is expected to remain in the EU’s Excessive Deficit Procedure. Staff estimates a full-year deficit of 4.4 percent of GDP,2 compared to the budget target of 2.7 percent, implying a loosening of 0.5 percent of GDP in the structural primary fiscal balance. The deficit exceeded the budget plan despite larger-than-expected savings on interest and social expenditures (reflecting the fall in unemployment), as revenues fell well short of the authorities’ ambitious targets.

13. The weak financial sector continued to require budgetary support. The resolution of Banif in December 2015 amounted to a fiscal cost of at least 1.2 percent of GDP.3 In addition, the 2014 fiscal outturn has been revised to reclassify the loan provided to the Portuguese Resolution Fund for the recapitalization of Novo Banco as a fiscal outlay, increasing the deficit to 7.2 percent of GDP from the 4.5 percent that was initially reported.

14. The 2016 budget proposal represents a clear departure from Portugal’s medium-term fiscal commitments under the 2015 Stability Program. It targets a fiscal deficit of 2.2 percent of GDP, compared with 1.8 percent in the Stability Program submitted to the EU last April. The budget proposal relies on more optimistic macroeconomic projections than in staff’s baseline, and calls for increases in a range of indirect taxes and one-off levies to accommodate the expiration of several program measures. In addition, the budget projects sizable expenditure savings from phasing-out several social and vocational training programs, cutting back on active labor market policies, and introducing a nominal freeze on intermediate consumption. Fiscal policy is geared toward increasing households’ income by fully reversing public sector wage cuts this year and scaling back the personal income tax surcharge.

2 Including fiscal costs related to the resolution of Banif. 3 The final fiscal cost will be calculated by the National Institute of Statistics once the liquidation of Banif is complete.

-10

-8

-6

-4

-2

0

2012 2013 2014 2015

Portugal: Fiscal Balance(Percent GDP)

Non-financial sector balance Financial sector costs

Sources: INE; and IMF staff calculations.

Source: IMF (2016)

2. CONTROLLING SPENDING

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2010 2014

Government revenue 40.6% 44.5%

Public investment 7.2% 3.2%

Transfers 22.1% 23.1%

Total spending - inv. 80bn 79bn

Source: Reis (2016)

3. LABOR MARKET

20

0"

2"

4"

6"

8"

10"

12"

14"

16"

18"

20"

2010Jan"

2010Mar"

2010May"

2010Jul"

2010Sep"

2010Nov"

2011Jan"

2011Mar"

2011May"

2011Jul"

2011Sep"

2011Nov"

2012Jan"

2012Mar"

2012May"

2012Jul"

2012Sep"

2012Nov"

2013Jan"

2013Mar"

2013May"

2013Jul"

2013Sep"

2013Nov"

2014Jan"

2014Mar"

2014May"

2014Jul"

2014Sep"

2014Nov"

2015Jan"

2015Mar"

2015May"

2015Jul"

Unemployment*rate*

Source: Reis (2016)

3. LABOR MARKET

21

!9%$

!8%$

!7%$

!6%$

!5%$

!4%$

!3%$

!2%$

!1%$

0%$!1000$ !800$ !600$ !400$ !200$ 0$ 200$ 400$

Chan

ge'in'wages'

Change'in'employment'(thousands)'

Source: Reis (2016)

4. CAPITAL ALLOCATION

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• Agriculture and construction account for 2/3 of fall in employment.

• Output per hour increased the most in wholesale and retail trade and real estate.

• Tradable sector grew, exports boomed.

PORTUGAL

4 INTERNATIONAL MONETARY FUND

RECENT DEVELOPMENTS, OUTLOOK AND RISKS 1. Since the second Post-Program Monitoring, a new government assumed office on November 26. The minority government–led by the center-left Socialist party and supported by

two smaller left-wing parties—has pledged to

boost growth and household incomes through a

menu of policy measures as described further in

this report. Presidential elections were also held

on January 24, with the centre-right candidate

elected in the first round of balloting.

2. Highly accommodative macroeconomic conditions generated only modest growth in the presence of remaining structural impediments. In 2015, low interest rates, a weak

euro, and low oil prices remained largely in place.

Aided by this favorable environment, an

expansionary fiscal stance at home, and strong

growth in Spain—Portugal’s largest export market—real GDP grew by 1.5 percent.

3. The consumption-driven recovery is running out of steam. With investment constrained

by the overhang of public and private debt and by

weaknesses in the banking system, private

consumption has been the engine of the current

recovery. Although high taxes are necessary due to

limited fiscal space, they inhibit the growth of

disposable income. Consumption nevertheless grew

briskly—on account of falling unemployment and

declining uncertainty— facilitated by lower savings.

In recent months, however, the rapid decline in the

unemployment rate came to an end (Box 1), the

savings rate reached historic lows, and high-

frequency indicators stabilized.

4. The export sector remains a bright spot. In 2015, credit to exporters increased despite

contracting overall, suggesting benefits from

structural reforms and from improvements in

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26

28

30

32

34

36

38

40

42

-6

-4

-2

0

2

4

6

8

10

12

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Portugal: Export Growth During the Crisis(Percent GDP)

Goods contribution

Tourism contribution

Other services contribution

Exports of goods and services (RHS)

Sources: Haver Analytics; and IMF staff calculations.

2014 2015

Total domestic demand 2.2 2.5Final consumption expenditure 1.4 1.9

Public -0.1 0.1

Private 1.5 1.7

Gross fixed capital formation 0.4 0.6

Changes in inventories 0.4 0.0

Foreign balance -1.3 -1.0Exports, goods and services 1.6 2.1

Imports, goods and services -2.9 -3.1

Real GDP growth (Percent) 0.9 1.5

Contributions to Year-on-Year Growth(Percentage points, unless indicated otherwise)

-0.6

-0.3

0.0

0.3

0.6

0.9

1.2

Portugal Spain

Real GDP(Quarter-on-quarter percent change)

Source: Haver Analytics.

Last obs. 2015Q4

Source: IMF (2016)

5. CONCLUSION

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• Simple aggregates suggest a public finances success, macro failure.

• But if look deeper, conclude the opposite:

• limited success in curbing pension growth.

• many encouraging signs of reallocation of resources.

Present and future 2015-…

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NEW GOVERNMENT• Public finances:

• End of austerity? Much ado about nothing.• Redistribution. More taxes on private sector, higher

wages and pensions on public sector.

• The economy: • Cancel foreign private concessions, break promise

on corporate income taxes, refers airline deal. • Investment stops, unemployment inflection.• Use 1.7bn of Social Security to finance construction.

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THE BANKING SECTOR• A view into the new banking union

• BANIF, now Santander• Bank of Portugal decides, DG Comp vetoes, ECB

bullies, and government gets the bill.

• State of major banks • Novo Banco: bailed out, for sale• BCP: shares worth 2c, waiting for investor• CGD: undercapitalized, DG Comp blocking it• BPI: Angola troubles, takeover by Spanish Caixa.

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CREDIT SHRINKING, BANKS BUST

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PORTUGAL

22 INTERNATIONAL MONETARY FUND

Figure 4. Portugal: Financial Sector Developments

Capital is broadly stable… …but NPLs continue to rise as provisioning levels off.

Reliance on Eurosystem financing has stabilized at a lower

level… …and loan-to-deposit ratios are falling.

Lending continues to contract… …and profitability remains weak.

Sources: Haver Analytics; Bank of Portugal; and IMF staff calculations.

0

2

4

6

8

10

12

14

2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3

Core Tier 1/Common Equity Tier 1 Capital Ratio (Percent)

0

10

20

30

40

50

60

70

Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15

Eurosystem Financing(Billions of euros)

Last obs. Dec. 2015

0

10

20

30

40

50

60

70

80

0

2

4

6

8

10

12

14

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14

Non-Performing Loans and Provisioning

Non-performing loans (Percent of total loans)Provisioning coverage ratio (Percent, RHS)

Last obs. Sep. 2015

0

50

100

150

200

250

300

0

20

40

60

80

100

120

140

160

Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14 Apr-15

Deposits (Billions of euros, RHS)Loan-to-deposit ratio (Percent)

Loans and DepositsLast obs. Dec. 2015

-30

-25

-20

-15

-10

-5

0

5

10

15

20

2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3

Return on Equity(Percent)

-5

-4

-3

-2

-1

0

1

2

3

4

Mar-10 Dec-10 Sep-11 Jun-12 Mar-13 Dec-13 Sep-14 Jun-15

Last obs. Dec. 2015

Private Sector Credit(Year-on-year percent change)

Source: IMF (2016)

CONCLUSION• Common disease: capital, banks, misallocation.

• Particular response: • Like Greece, extensive, like Ireland, compliance.• Unlike Greece, modest austerity, unlike Ireland, no

growth, unlike Spain, banks not resolved.

• Looking forward: • Public debt still high.• Economy showing signs of stagnation again.• Banks a major headache.

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