The Portuguese fiscal crisis that never came

So…Obviously this title does’t make sense (or does it?).

Portugal was “rescued” by the Troika (IMF, ECB and EU) because of its increasing sovereign interest rates due to high levels of deficits and debt. Right?

It should be clear by now to everyone interested in economics that this story isn’t completely right: Portugal was following European rules until the Global Recession, the deficits and debt only soared afterwards (as they should in a recession). But, Portugal was packaged with Greece and Ireland (different reason) by investors and credit agencies due to the European Monetary Union disabilities to deal with asymmetric shocks and so the Government faced difficult times to finance its deficits at reasonable rates.

In broad terms, Portugal faced difficulties because as investors seen that Greece was having several problems to finance its deficits, maybe some other peripheral countries with external imbalances (large current account deficits: mainly private) would eventually face similar problems, while the ECB waved and smiled…

Ok. So Portugal crisis was not a fiscal crisis in its inception.

But let’s assume there was no Greece, what would eventually happen?

Well, government deficits were not that large  and debt was rising but was still no big deal (remember the target was 3% deficit and 60% debt, as a percentage of GDP).

But maybe…maybe, the European targets/rules were not that great, because they assumed a 5% nominal growth rate, which for Portugal was clearly a joke, so instead of the Debt ratio stabilizing at 60%, it kept on increasing..

 

portugal-government-debt-to-gdp

In conclusion, were the right wing parties right about the fiscal crisis that never came?

Well, kind of… The deficits that Portugal had were too high compared with its growth rate, which eventually (with our dysfunctional Monetary Union) would lead to a fiscal crisis.

So… The European rules are too simple-minded, the left wing parties didn’t see the possible fiscal crisis that was to come, and the right wing parties misinterpreted the cause of the Portuguese crisis.

We have a lovely weather!

(At least in the summer)

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