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PORTUGAL 2014: THE CONSEQUENCES OF A BAILOUT
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that private consumption shrank more than ex-
pected. The shrinkage of private consumption,
despite its (undesirable) recessionary effect, led
to a (desirable) reduction in imports that far ex-
ceeded the IMF’s forecast and gave rise to a very
rapid rebalancing of the current account in
2013, despite a smaller rise in exports than ex-
pected.
Fueled by budget cuts and increased tax
rates, the recession would cause, as a paradoxi-
cal side-effect, an obvious difficulty in lowering
fiscal deficits by the amount hoped for and
steering public debt back onto a sustainable
path. Not once during the programme were the
original annual fiscal deficit targets met. At the
end of the programme, in 2014, instead of the
IMF’s target deficit of 2.3% of GDP, a deficit of
4.6% was recorded. Public debt, which suppos-
edly should start to reverse in 2014 and to reach
115% of GDP, in fact hit 129% in the same year.
The deleveraging of the banking sector that
was sought by the programme did in fact take
place. However, although the banks were capi-
talised with funds from the programme, the de-
leveraging was accompanied by a noticeable
credit squeeze and a rise in bad debt, which
forced the banks to post very high levels of im-
pairment. Instead of stabilising the financial sec-
tor, in 2014 the recession caused the bankrupt-
cy and resulting resolution of one of the biggest
private banks in Portugal –Banco Espírito Santo.
When the programme ended, the Portuguese
government and its authors claimed that it had
been a success. According to the IMF
2
, the pro-
gramme had stabilised the Portuguese econo-
my, restored access to sovereign debt markets,
permitted a (moderate) return to growth in the
2
IMF (2015), Portugal, First Post-Program Monitoring, IMF
Country Report No. 15/21.
last seven quarters, brought about substantial
fiscal consolidation and produced current ac-
count surpluses.
However, the IMF itself could not help quali-
fying this appraisal by noting in the above-men-
tioned post-program monitoring report that: 1)
the recovery recorded in the last seven months
was tending to weaken, since it was driven by
private consumption and not net exports; 2) the
drop in the unemployment rate, faster than the
growth rate, was overestimated in the statistical
measures of unemployment; 3) there was a risk
of deflation; 4) the current account surplus was
narrowing and a loss of market share had been
recorded in 2014.
In conclusion, even in the aspects evaluated
by the IMF, an independent assessment could
permit one to conclude that the programme
was limited to producing an adjustment in the
external balance (current account) at the cost of
increasing the internal imbalance (employment
and level of activity). The programme barely
contained the growth of external debt, having
replaced the external bank debt by public exter-
nal debt, leaving behind a trail of company and
family bankruptcies, with survivors who are as
far or further in debt than at the beginning of
the process. None of the problems Portuguese
economy diagnosed by the IMF – weak com-
petitiveness, unsustainable budget deficits and
the high indebtedness of the financial and com-
pany sector – have been solved. This is almost
acknowledged by the IMF in its post-programme
evaluation. However, far from proposing a
change in the policies, the IMF is suggesting
simply what it proposed before: greater fiscal
consolidation and even greater reductions in
“wage costs”.