Portugal is now facing the same fears that swept through Greece early in the year. Some statistics make for grim reading.
Portugese banks rely on foreign investment to cover 40pc of their assets. Portugal is a net borrower from abroad. This is very risky when foreign investors start to be concerned about the reliability of Portugese bonds. Something that Iceland found out quite recently
Combined public and private sector debt in Portugal stands at 325pc of GDP (compared to 247pc for Greece) This means the private sector has little room for buying government debt. It is one of the higest levels of combined debt in the world.
When there is a fiscal crunch, it places pressure on governments to rush through rapid spending cuts. But, these spending cuts have the habit of failing to improve the budgetary situation. Spending cuts harm the economy leading to lower confidence, lower growth and higher unemployment. This in turn leads to lower tax receipts and higher welfare spending. Thus the cyclical budget worsens.
It is becoming a familiar story across Europe, with Ireland failing to impress markets, despite its period of austerity. Ireland cut public sector wages significantly, but this, unsurprisingly led to a fall in Nominal GDP of 19%. This is a huge problem, and it has meant that bond yields on Irish debt have risen to over 6%. It is a vicious cycle, lower growth leads to lower tax receipts and a bigger deficit as a % of GDP. This leads to demand for more spending cuts, which in turn lead to lower GDP and so on.
This might seem conclusive evidence of the dangers of rushing through austerity measures which damage economic growth. But, it looks like the UK is happy to put on this fiscal hair shirt .
The one thing to be said for the UK economy is that at least we are not in the Euro. Portugal has low productivity (64% of EU average). This makes the economy unproductive and damages exports. Yet, in the absence of effective supply side policies and no ability to devalue, they are stuck with their unproductivity only able to pursue the policy of cutting spending.
The UK is likely to avoid the outcome of Greece, Portugal and Ireland, because we have independent monetary policy and floating exchange rate. But, it will still be a period of sluggish growth.