End of summer break

I am back from my summer break. Back from 15 days in a village in Southern Portugal. Two weeks spent among elder people as old folks make now most of the residents in rural areas. And a period to learn again the virtues of simplicity, frugality and the ability to make do with whatever is available

Portugal could have been brought down by a single man

Ricardo Salgado, the top man at the Portuguese bank Banco Espírito Santo (BES) had been called by his countrymen the “owner of everything”. He was indeed a very influential fellow. Now, it has been concluded that his bank was in shambles and that the gentleman, who had friends in almost every corner of the political, economic and academic elite chessboards, was about to bring the Portuguese economy down, not just his bank and business empire. His business interests were wide and covered several sectors. The misjudgments, the malpractices and the cover-ups have therefore a very wide impact. The true measure of this collapse is yet to be fully grasped. For the time being, only the bank side of the story has been safeguarded. But an initial lesson that can be learned from this saga is that when a banker is also a major business actor, in a relatively small economy, things can go very wrong. 

Lisbon and the cruise ships

Lisbon is now a major stop in the itinerary of the cruise ships that navigate this corner of Europe. At this time of the year, it is usual to see two or three big vessels by the tourist harbour. Today they were six, all very large.

This daily influx of visitors is bringing some much need vitality to the centre of the city, lots of people with some euros to spend. It also gives the key monumental areas a strong sense of economic dynamism. And that is deeply appreciated, particularly at a time when many Portuguese try to move out of a morose approach to the crisis and be able to access new sources of income. 

Portugal´s financial image has improved

Portugal´s international financial image got a boost today. The government managed to sell 5-year sovereign debt paper for a total amount of 3,5 billion euros at a very favourable rate: 4,657%.

The point is now to be able to attract the foreign investors’ interest to put money into the real economy. The Portuguese entrepreneurs have been doing well and exports have increased during 2013. But that´s is not enough. The country needs major injections of capital into the productive sectors. And that can only happen if the govern manages to capitalise on the image of the country and show Portugal as a safe investment destination. 

The weather is not good

Today we had municipal elections in Portugal. It is, at this time, a bit early to get to conclusions. But it is obvious that many will read the results as a defeat for the government. And this will bring additional political stress to a situation is far from being stable. The country will continue to be a poor lame duck in a European scene that is less and less prepared those that keep limping behind. 

Summer in Portugal

The preliminary assessments seem to indicate that this has been so far a good summer season in Portugal. The number of foreign visitors is up. Many of them chose the country because it remains tranquil and predictable. There have been no serious labour disruptions this summer.  It should continue like that.

Lisbon as seen from my veranda looks like a major destination for large cruise ships. Every day I see at least two coming in the morning for a day visit. It’s a great view. We need the business they bring in. But we also need them to have a good day in the city and be able to go back and tell everyone that the place is fine and worth the visit.

At the end of the day, tourism is about business and image. Both are critical for a country like Portugal. 

Alentejo, a Province in Southern Portugal

As I drove over the vast expanses of land that make Alentejo, the Southern Province of Portugal, I thought that all those, all over the world, that are interested in investing in commercial agriculture, food production, biofuels, exotic fruits, should consider visiting the region. There is so much farming land available there, just waiting for capital investment and technology. And the weather, on top of it, is not bad at all. 

Portugal loves political confusion

Yesterday, the Portuguese Finance Minister left the government. That was no big surprise, in the end, as many had expected that decision for quite a bit of time. 

But today we got the real surprise: the Foreign Minister, Paulo Portas, who is also the leader of the junior party in the coalition government, called it quits. The destabilising impact of his decision is enormous. I do not expect the current government to survive such blow. 

Actually, Portas seems to have the same opinion. By quitting now he is getting ready to come back in late September, in alliance with the Socialist Party. So, he is playing for his political continuity. 

The problem is that all this has a very deep impact on Portugal’s access to the international financial markets. Without proper access there will be no money to bridge the public finances gap. That means plenty of hard times ahead. But in party politics that’s not important. What is really critical is for the political leaders to have access to power and everything that comes with it. They are no statesmen. They are, like you and me, just trying to make a nice living out of bad politics and the country’s ruin. 

It’s a matter of choice. 

Portugal's Finance Minister has resigned

The Portuguese Finance Minister, Vítor Gaspar, resigned this afternoon. He had lost the public opinion battle long ago, as he was seen by the voters as the engine of the austerity programme Portugal has been implementing for two years. His name was, in the people’s minds, linked to taxes and economic recession. This was, of course, an unfair connection, as the economic situation of the country is much more complex than just the austerity measures he had to adopt. But politics are like that: you cannot find yourself without a popular power base.

For a long period, his power came from the confidence the Prime Minister had on his abilities to master the intricacies of the financial adjustment programme in addition to fact that Gaspar had a lot of support in Brussels, Berlin, Frankfurt and other EU capitals. But this was a time-bound power base, condemned to die. As the Prime Minister felt more and more isolated, including within his own party, his support to the man everyone identifies with the austerity could only come to an end. It has now happened. And Gaspar, who is an outsider in terms of the national politics, could read the writing on the wall. 

Strong, capable and accepted leadership is critical

The Portuguese Constitutional Court has reviewed the 2013 national budget law and declared four revenue generating measures invalid because they violate the spirit of the country’s Constitution. The cancellation of these fiscal initiatives has an impact on the overall budget deficit, as they increase it by 0.8% to reach a deficit of around 6.3% of GDP this year. This is way above the amount agreed with Portugal’s external creditors. It projects a negative international image that contradicts the very serious stabilisation efforts the country has implemented so far.

The Court’s decision has created a major political crisis. The Prime-Minister met the President this evening to review possible options. But there aren't many, in the short term. The stabilisation process requires a long time horizon. The country has to be able to convince its external partners that as it pleads for more time and flexibility it also stays the reform course. It has also to show that it has a strong, capable and accepted leadership at the rudder…  

Portugal on the street

Large crowds marched today in the key cities and towns of Portugal against the austerity measures the government is implementing. The key feature of these manifestations was their peaceful nature. People have shown, once more, that they can be on the streets and behave responsibly.

Many of the protesters could be defined as middle class families that are going through a process of impoverishment. For many of them and for many years their living standards were based on a fiction: that the country could afford a level of public expenditures that was well beyond the means of the economy. With the international financial crisis this fiction could no longer be sustained. The state could no longer borrow in the international markets at low rates of interest. To be able to finance the public sector and adjust spending to the real possibilities of the economy over a short period of time, the state had to look for funds coming from the IMF, the ECB and the European Commission. These monies came with strings attached, as expected. And that hurts. It hurts even further because the government has realised – but cannot explain it properly and clearly, for reasons that are beyond my understanding – that the long term sustainability of public expenditures calls for further cuts, particularly if one takes into account the fragility of the economy and the very low rate of productive investment that has been recorded so far.

In a country where the state was the true engine of the economy – unfortunately the private sector had not been able during the last two decades to take off and expand; it remained too dependent of state projects and orders and largely linked to political patronage – if public expenditure goes significantly down most of the economy tends to collapse.

The point is to get as many investments from outside as possible. My hope is that today’s popular civism be perceived by those potentially interested in investing in Portugal as an encouragement to do so. 

The Portuguese kindergarten

The IMF has just published a review of Portugal’s public expenditures. The report came as a bomb at a time when the public debate about 2013 State budget had already generated an avalanche of political fights and great instability, including within the governing parties. Now, with the IMF’s recommendations on the table, the country looks like a big fire being dealt with gasoline. There is widespread cacophony, exaltation and very little self-examination and reflection. It is like a kindergarten without any adult in charge. 

Sovereign nightmares

The New Year brings back the sovereign debt question as the most urgent issue for the EU member States. Now that it is clear that Greece and Ireland have reached unsustainable levels of debt, all the attentions are moving to Portugal. On Wednesday next week, Lisbon will be again in the market to try to place Treasury paper. There is deep anxiety in Brussels and other capitals about the investors' response to that move.

The Portuguese government has shown they prefer to pay very high rates of interest to making use of the EU/IMF financial facility. This option is politically expedient in the short run. It delays the moment for hard decisions, particularly at a time when the presidential elections are around the corner, on 23 January, and the government's candidate is lagging behind in the polls. But, sooner or later, the moment of truth will come. The poor performance of the country's economy will then hit the wall.