Can Portugal avoid a bailout?

As top Portuguese banks give public signals that they will stop buying government debt, pressure is mounting for an immediate plea for external emergency financial support. Nevertheless, the socialist prime-minister José Sócrates – now in charge of a caretaker government as early elections are scheduled for June 5th – continues to vow to ‘resist’ seeking external aid. The refusal is likely grounded on an estimation of the internal political costs associated with requesting foreign assistance, but the truth is that it now seems increasingly likely that Portuguese authorities will seek a bailout in the near future. With the country facing a total of about €9 billion bond redemptions in April and June and the long-term debt markets virtually closed to the Portuguese government, the current option of auctioning 6 and 12-month bills seems unsustainable.

In the short term, the only workable alternative to a bailout (or full-fledged liquidity crisis) would be to enact immediate widespread cuts in public sector pay as well as in government transfers and subsidies. These cuts would have to be accompanied by a freeze on spending on public projects and by a credible commitment to privatise (or in some cases liquidate) state owned enterprises, particularly – but not only – in the transport, financial and media sectors.

This seems an extremely unlikely scenario given the ongoing political campaign leading up to the election and the growing levels of social unrest and strikes. Adding to the political and economic uncertainty is the fact that while the opposition centre-right is ahead in the polls, the current margin far from assures that a stable governing majority will result from the June 5th election. To further complicate matters, the two far-left parties (the Communist Party and the Left Block) continue to poll between 15% and 20%.

In the medium and long term, solving Portugal’s grave economic problems will require the consistent implementation of a wider range of pro-growth structural reforms that are able to address the structural causes of the crisis (I discuss these in a forthcoming article in Economic Affairs: ‘The Portuguese Malaise’). But even assuming that a stable centre-right government emerges from the upcoming election, it is by no means certain that an agenda of structural market-oriented reform will be pursued given that statist ideas continue to enjoy significant support across Portuguese society.