In the last few days, we witnessed dramatic reactions to the downgrade of the rating of the Portuguese public debt and to the volatility in the financial markets. Some analysts and politicians went as far to alert us that we were pretty much on the edge of an abyss and that the country has no future. Some have even argued that the spreads are increasing so much that soon enough we will not be able to repay our debts and we will have to declare bankruptcy. They might as well be right (although I suspect, and I hope, that they are not). Still, in spite of all the hype and drama, shall we have a little common sense here? How can anyone honestly say that 6%-7% interest rates are unprecedented and that will make the repayment of our public debt unsustainable? Really? It might worthwhile remembering some things from our recent past then. When the IMF came to Portugal in 1983, Portuguese public finances were also in very bad shape, and thus the IMF imposed some draconian measures in order to put things back in shape. A couple of years after, the IMF was praising Portugal for being so successful in correcting its fiscal imbalances (there are important lessons to learn from this period, in fact). It is also interesting to remember that, at the time, the government was paying more than 20% interest rates in order to finance its debts (see table below). In fact, we don’t even have to go that far in time. In the 1990s, before we started the process of nominal convergence on the way to the euro, the interest rates on government bonds were still hovering around 10%.
What has changed since then? Well, we stopped growing (our biggest problem) and the country’s external indebtedness increased substantially. Thus, the risks associated with our debt are now greater. Still, this does not mean necessarily that we are on the edge of the abyss. As long as the government is responsible enough to follow some good policies (i.e., cut expenditure, suspend the large public works projected, and stops increasing future public debt through the PPPs), we will certainly be a lot more prepared to convince the markets that we don’t deserve their wrath. The big question is thus whether this government can, for once, stop behaving irresponsibly. After the latest news, I am not so sure.