Engulfed by the global economic crisis, Portugal has continued to fail in its bid to profit from its ‘good student’ billing. A series of financial reforms have to date been unable to correct the country’s sorry state of accounts, but it did not stop the government in October from announcing additional austerity measures which were aimed at balancing its lopsided books and fulfilling the stringent terms of its international bailout obligations.
In contrast to his Prime Minister, Finance Minister Vítor Gaspar in October painted a grim picture of the year ahead as he attempted to justify a series of supplementary taxes that will be levied in 2013.
“Portugal was staring bankruptcy in the face. We were one step away from being unable to pay wages and pensions”, said the Finance Minister, adding “the climate of uncertainty contrasts with the progress we have made since requesting the bailout”, as he attempted to set the tone for the latest set of austerity measures he was about to unveil.
“Parallel to this enormous increase in taxes, the government will also reduce spending”, Minister Gaspar pledged, but said he expected public spending to have shrunk by four billion euros in 2014.
“These sacrifices will not be in vain and will lead Portugal back to financial freedom. This is the route we need to take to secure Portugal’s future”, concluded Mr. Gaspar.
Following this unpleasant news, and while domestic and foreign analysts agree the effects of the economic crisis will be felt for some time still in Portugal, indicators published in mid-October revealed its adverse effects are expected to become increasingly less pronounced.
Both the International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD) in October forecast an improvement in Portugal’s economic situation in 2013, albeit one where the country is anticipated to remain in a state of recession.
The IMF predicted that Portugal’s economy would shrink by 1.0 percent of GDP next year, a marked improvement on the 3.7 percent contraction expected for 2012 and also better than the 1.7 percent decrease reported in 2011.
But the IMF did warn in its outlook published that delays in resolving the crisis are likely to have increased the amount of asset deleveraging by banks, which may further constrain the supply of bank credit and reinforce financial and economic fragmentation in the euro area.
The IMF called for decisive policy measures to be taken urgently, as mounting pressure on banks in Europe could result in asset shrinkage by as much as $2.8 trillion USD to $4.5 trillion USD through the end of 2013, with the largest burden of credit supply contraction falling on the euro area periphery, which includes countries like Portugal.
The OECD meanwhile also indicated that Portugal’s macro-economic figures are showing signs of recovery.
The organisation confirmed the recession was losing intensity, with its economic indicators showing that Portugal’s economy has been rising since April, and latest available numbers reveal the Portuguese economy to be in its best condition since October 2011.
The OECD projected that while the economy will still be in a recession at the beginning of 2013, it would be less profound, with a possibility that positive growth in the economy could be registered as early as the third quarter of 2013, technically heralding the end of the recession.
While Portugal’s economic woes are well-documented the world over, it is not a common fact that the country is one of the world’s wealthiest when comparing gold reserves. With the crippling side-effects of austerity becoming more apparent by the day, The Portugal News questioned whether Portugal should dig into its stock of the precious commodity and ease the plight of its increasingly impoverished society.
Portugal is currently sitting on gold reserves worth more than 16 billion euros, which is up 1.4 billion euros on its value at the beginning of the year. Its gold reserves currently amount to 382.5 tonnes - more than that held by the United Kingdom and almost double the amount held jointly in the vaults of major gold-producing countries South Africa and Australia.
The World Gold Council (WGC) suggested that the European Parliament pushes for Portugal to be allowed to offer gold as collateral for sovereign debt issuance.
“Portugal has gold reserves in excess of 20 percent of its financing requirements over the next two years”, the World Gold Council said in a report based on research done on its behalf by the London-based group, Europe Economics.
Portugal’s gold is not the collective property of the Eurozone and is the sole beneficiary of the gold held at the Bank of Portugal in Lisbon.
But it would still need EU approval to associate its gold with any financial transaction.
The WGC stresses the obvious point that money (euros) “is abstract – numbers on a computer screen. By contrast, gold is concrete. Gold bars might sit in a warehouse or a vault. Creditors could go and see them.”
While its stressed monetary actions raise considerable issues of reliability, “the concreteness and simplicity of gold as collateral makes it more credible.
“Physical gold bars could be transferred to a third party location (e.g. London). The Portuguese government would get them back when their debts were redeemed and would not get them back if they defaulted. It is difficult to see how a policy could be more credible”, the European Economics report argued.