Averting the Next Greece: Portugal Needs More Money To Stay Afloat

By Christoph Pauly

With its massive austerity measures, Portugal has become the poster child of the troika of the EU, ECB and IMF. But the country is still stuck in a deep recession and it is unclear how it will return to growth. It may need to rely on European loans for years to come.

Photo Gallery: Austerity in Portugal Photos
DPA

Nothing is sacred to Pedro Passos Coelho, not even Carnival. Portugal's prime minister expects government employees at their desks and working on Entrudo, the traditional high point of the country's Carnival celebrations, which falls on this Tuesday.

This is "not the time to talk about tradition," the conservative head of state has commanded those of his citizens who see the move as an attack on their culture. Rather, he says, they should stop "whining" about austerity measures. It's time, the prime minister adds, to break free of old structures and to change "lazy and sometimes self-involved patterns of behavior."

Fans of Carnival celebrations are not the only ones affected -- churchgoers and nationalists will have to make bitter sacrifices as well. In response to this national state of emergency, the Portuguese government plans to do away with four public holidays. Corpus Christi and Assumption are to be crossed off the calendar without a replacement, and public holidays celebrating Portugal's first republic and the 1640 end to its union with Spain will no longer be commemorated.

Fears of Default

This readiness to make sacrifices comes as welcome news to the so-called troika, made up of the European Commission, the International Monetary Fund (IMF) and the European Central Bank (ECB), whose officials are currently in Lisbon to evaluate the country's reform program. The troika hadn't even asked for such drastic measures, and their austerity watchdogs' findings are sure to be positive. In recent months, the Portuguese government has also implemented brutal tax hikes and cut pensions and unemployment benefits.

All this makes Portugal a poster child for austerity measures in the eyes of Brussels and Berlin. German Finance Minister Wolfgang Schäuble went so far last week as to promise his Portuguese counterpart Vítor Gaspar additional aid, even though the international community has already provided the country with €78 billion ($101 billion) worth of support. "If there would be a necessity for an adjustment of the Portugal (program), we would be ready to do that," Schäuble told Gaspar, who dutifully expressed his thanks. The exchange, caught by a camera crew, quickly became a popular video clip on YouTube.

But does Portugal really have a better chance of avoiding bankruptcy than Greece does? Or is the country simply the next domino destined to fall in the course of the euro crisis?

Financial markets take a far more critical view of Portugal than does the troika. They are assuming there is a 71 percent probability that the country will default within the next five years, as reflected in insurance premiums on Portuguese government bonds -- so-called credit default swaps -- in early February. Deutsche Bank writes that market participants expect that "leading European politicians' assurances notwithstanding, the private sector will become involved in the case of Lisbon as well, or a debt default may even occur."

Collapsing Demand

The €78 billion in aid is enough to last until September 2013, since Portugal has also managed, thanks to the European bailout, to place some short-term bonds on the market. Still, the moment of truth won't be long in coming. "Emergency plans, in case Portugal is not able to return to the capital market, need to be specified soon and in a credible fashion," major Swiss bank Credit Suisse says.

For now, Portugal finds itself in a deep recession. As a result of the government's drastic austerity measures, most people have considerably less money at their disposal than they had before. With domestic demand collapsing, unemployment has risen to record levels. Last year, 30 percent fewer cars were sold in Portugal.

At least 200,000 people marched through the streets of Lisbon on Feb. 11, starting in three different areas of the city and converging on the centrally located Praça do Comércio on the Tagus River. "No to inequality, no to impoverishment," they shouted.

Just as in demonstrations that have taken place in Greece, German Chancellor Angela Merkel was a favorite subject of their signs. One showed the chancellor as a dominatrix, forcing a naked Prime Minister Coelho to his knees.

Competitive on the Global Market

Rogério Hortelão is one person who hasn't lost his optimism despite all the problems. "We're good at improvising," says the president of auto parts supplier Incompol. Hortelão, a former mechanic with the Portuguese Air Force, started his business 25 years ago with a lathe and three men. Now, 350 employees at his factory in Samora Correia use heavy equipment to stamp out metal components for BMW and other customers. In 2009, the last time that demand within the automotive industry collapsed, Hortelão took the same approach to fighting the crisis as many mid-sized German companies did. He didn't fire a single employee, but instead gave them further training. It enabled him to fulfill a personal dream. Incompol now uses high-tech equipment to weld together individual components for aircraft manufacturers such as Embraer in Brazil and Pilatus in Switzerland.

Most of Hortelão's products go to buyers in other countries, and even his domestic customers are subsidiaries of international corporations. This allows the company to remain independent of the government's austerity programs.

Unlike Greece, Portugal certainly has competitive companies capable of succeeding on the global market. Europe's largest and most modern paper factory, for example, is located near the Portuguese port city of Setúbal.

Portugal has gradually overtaken Scandinavia when it comes to producing high quality copy paper. "Each year we sell each person in Germany at least 500 sheets of paper for photocopying," Hermano Mendonça, marketing director for Portucel, says in fluent English. Portucel, a publicly traded company that is majority owned by a single Portuguese family, exported nearly €1.5 billion worth of paper in 2011.

The reason behind this success is the large eucalyptus forests that now grow in Portugal. Conservationists take a critical view of these monocultures, but the trees' long fibers provide good raw material for paper. Portucel owns 120,000 hectares (300,000 acres) of woodland and also buys timber from thousands of private landowners. The hunger for raw material is so great that the company has plans for additional timber plantations in the former Portuguese colonies Mozambique and Brazil.

Too High Costs

Export-oriented industries are the ones still doing good business here in this country at the far southwestern corner of Europe. When Portugal joined the EU in 1986, several German corporations became heavily involved here, before the advent of strong competition from locations in Eastern Europe and Asia. Portugal is still benefiting from investments made during that period.

Volkswagen, for example, has 3,600 employees producing its Sharan minivan, as well as its Eos and Scirocco models, at its facility near Setúbal. Production increased by a third last year, with almost 100 percent of vehicles destined for export. German engineering and electronics company Bosch also has several thousand employees in Portugal and runs Europe's largest manufacturing facility for car radios in Braga in northern Portugal. The company's thermotechnology subsidiary is even based in Portugal.

In more recent years, though, German companies have stopped making major investments in Portugal. The country is certainly a competitive location, because salaries haven't risen nearly as much as in Greece, but transportation costs for the 2,000-kilometer (1,200-mile) trip to the periphery of Europe are so high, and local markets so small, that in recent years most companies have preferred to relocate to Asia.

Subsidies from Brussels, meanwhile, meant that many Portuguese citizens felt little incentive to pursue their own ventures. German Chancellor Merkel had sharp criticism for costly bridges and tunnels constructed on the Portuguese island of Madeira, whose governor managed to rack up €6 billion in public debt. The highways around Lisbon are also among the best in Europe.

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