2 Current Global Economy
3 Current Portuguese Economy
4 Portugal´s debt position
5 Portugal: Risk ratings
The following course work will show the consequences of the financial crisis on the Portuguese economy and it will take a closer look on the current situation in this country. I also want to give an insight into the most intensive discussed topics concerning the Portugal economy at the moment. This will include for example the discussion on the Portuguese high debt succeeding the fair of a downgrading of the whole country and the biggest banks because of a decreasing willingness to pay back debt in the future. On the other hand I want to take into account the open discussion on “Eurobonds” which mentioned a way to lower high interest payments for Portugal, Greece and other strong hit countries.
The introduction will cover a short analysis of the current global economic situa- tion. Containing the main characteristic. Subsequently I want to address the cur- rent economic situation of Portugal. With the previously given background infor- mation of the global situation it should be easier to evaluate Portugal standing in Europe and the World.
Thereafter I want to go into details, like the high fiscal deficit of Portugal and the huge absolute national indebtedness. Here I also provide information about the creditors that are willing to lend money to Portugal. A topic concerning the risk measurement of Portugal and accompanied with higher interest rates for government bonds will go deeper in the states problem.
At the end of the seminar paper I bring up a few ideas how to get of this difficult situation and show a few economic outlooks for Portugal.
2 Current Global Economy
More than two years after the U.S. mortgage market began to struggle and leads to the biggest financial crisis since the Great Depression, financial markets are still unsettled. The financial crisis had a huge effect on global trade which experienced the sharpest drop since World War II. Unemployment rates in industrial countries increased skittish. Governments all over the world responded with an extraordi- nary policy to prevent the global financial system from systemic collapse. But there is still negative feedback out, which chalk down the financial instability.
Global aggregated demand plunged because of fragile consumer confidence and a lower desire for risk among investors in developed countries. Simultaneously to the economic downturn major banks had to cut domestic and international lending, which exacerbated the credit crunch. Studies showed that these slashes in bank credit supply to the corporate and household sector further affected negatively the economic situation and torpedoed a fast economic recovery.
Great efforts had to be done to break the cycle and revive money lending and hence growth. Regarding this, an announcement by the Group of 20 (G 20) leaders at their London summit in April 2009 was encouraging. It strengthens the capacity of multilateral financial institutions to lend to emerging economies. But there is still an open undertaking as Justin Lin, World Bank Chief Economist and Senior Vice President said:”The need to restructure the banking system, combined with emerging limits to expansionary policies in high-income countries, will prevent a global rebound from gaining traction”.1
Now in 2010 the recovery seems to continue after first signs in second half of 2009. But there are still concerns regarding the sustainability of global recovery. These concerns are related to some European economies which a fighting for their sustainability of public finances. This uncertainty where also shown by investors on the financial markets which caused bigger turbulences in the first half of 2010.
After the fall in Gross Domestic Product (GDP) in 2009, the global economy started to recover in 2010. The annual growth rate of world GDP for the first quar- ter 2010 was in real terms 4.8 per cent, for the second quarter it decelerated to 4.6 per cent. The recovery is expected to continue in second half of 2010, even if there are concerns about the sustainability of public finances in some European economies. The increase in global GDP is mainly driven by strong growth in emerging markets, whereas advanced economies as whole developed more mod- est. Particularly Asian economies contributed to global economic recovery caused by expansionary monetary and fiscal policies that boosted external and domestic demand. However, China and some other emerging markets are worrying because they fear an overheating of the economy. This could be seen at a strong increase in credit and housing market prices. Therefore China raised the minimum serve requirements of credit institutions and some flexibility in the reminbi exchange rate mechanism.2
Financial markets are still nervous because investors are still concerned of the fiscal position of several European high-income countries this poses a new challenge for the world economy. Assuming that a default or restructering of European sovereign debt is avoided, global GDP is projected to expand between
2.9 and 3.3 percent in 2010 and 2011, strengthening to between 3.2 and 3.5 percent in 2012, reversing the 2.1 percent decline in 2009. Developing economies are expected to grow between 5.7 and 6.2 percent each year from 2010-2012. This is more than twice as quickly as in high-income countries, growth is projected. High-income countries, however, are projected to grow between 2.1 and 2.3 percent in 2010—not enough to undo the 3.3 percent contraction in 2009.
However, should current uncertainty regarding developments in Europe persist, outturns could be weaker. Also more risk averse investors can effect these forecasts or in a less likely case a major crisis of confidence caused by a default or a major restructuring of high-income sovereign European debt. Besides this, a default or major restructuring among the EU-5 states (Greece, Ireland, Italy, Portugal and Spain) could threaten the payability of several banks in and outside the EU-5, with potentially far- reaching consequences for the global financial system.
The Worldbank call for an action by the Policy, high-income countries should focus on reducing the uncertainty surrounding the Greek debt issue. If this happened, growth in developing and high-income countries would benefit from a more rapid consolidation.3
3 Current Portuguese Economy
According to the latest flash estimate figures of the Quarterly National Accounts released by Instituto Nacional de Estatística (INE), in the third quarter of 2010, GDP increased 1.5 per cent, in year-on-year terms. This is an improvement compared to an increase of 1.4 per cent in the second quarter of 2010. Regarding the previous quarter, GDP increased 0.4 per cent.
The following graph shows the annual growth rate for Portugal´s GDP for the time period 2001 to 2010 - third quarter:4
Private consumption, in the third quarter of 2010, the retail turnover index released by INE decreased 0.8 per cent, in real terms, after an increase of 0.3 per cent in the second quarter of 2010. According to data on external merchandise trade, released by INE in September 2010, nominal exports increased by 13.6 per cent, in year-on-year terms, while imports presented a growth rate of 0.6 per cent. From January to September 2010, exports and imports increased 15.5 and 10.2 per cent, respectively, in year-on-year terms.
Furthermore the economic climate and the Consumer confidence indicators decrease again in November. Economic climate indicator diminished in October and in November, after stabilizing in the three previous months in the highest value since September 2008.
In November, the Consumer confidence indicator decreased significantly, intensifying the downward movement observed in the previous month and resuming the negative path started in November 2009.
The INE also released data according to external merchandise trade, released in September 2010; nominal exports increased 13.6 per cent, in year-on-year terms, while imports presented a growth rate of 0.6 per cent. From January to September 2010, exports and imports increased 15.5 and 10.2 per cent, respectively, in year- on-year terms.
Figures related to the unemployment rate released by the INE, show an increase to 10.9 per cent in the third quarter of 2010, which is 1.1 percent point higher than the value observed in the same quarter of the previous year.
1 The World Bank, Mansoor Dailami, Charting a Global Recovery, Global Development Finance 2009, p.17-22
2 Banco de Portugal, Economic Bulletin | Autumn 2010, Volume 16, Number 3 2010, p.11- 14
3 The World Bank, Global Economic Prospects--Summer 2010, Fiscal Headwinds and Recovery, June 10, 2010, p.1-2
4 Instituto Nacional de Estatística de Portugal, Estimate of the Portuguese Gross Domestic Product (GDP), 12 November 2010, p1-2
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- Institution / Hochschule
- Instituto Universitário de Lisboa – ISCTE BUSINESS SCHOOL - IUL Lisbon
- Economic Situation Portugal Debt Position Risk Rating Rating Debt Schuldenkrise international debt crisis Verschuldung PIGS Eurobonds downgrading fiscal deficit govern-ment bond national indebtedness Outlook