What do the Germans think of Portugal

Portugal: Always higher interest rates

"Interest rates are the instrument used by international investors to assess a country. They tell you what they think about Portugal," explains João Duque, professor at the University of Economics and Management (ISEG) in Lisbon.

If that's true, the Portuguese have every reason to worry: The interest that Portugal has to pay has been rising for months - they have now reached the frightening four percent limit for bonds with a ten-year term.

While Germany has to pay less and less for borrowed money, this item in the Portuguese national budget is growing. Most recently, Portugal had to spend 4.3 percent of its economic output on this, more than any other country in the EU. "We are now spending more on our debts than on the health of our citizens," Duque calculates.

The national debt was more than 130 percent of economic output in 2016, only Greece and Italy are even more indebted. In the short term, according to João Duque, Portugal can meet its payment obligations without any problems. In the long run, however, international donors would have their doubts. And that is just noticeable in interest rates.

Bad prospects for the future

Low incomes, the only slowly falling unemployment, but above all the aging of the population in the future are to be blamed on the one hand. Because that means that the state will have to spend a lot more money on social services in the future. On the other hand, economic growth of 1.4 percent was recently higher than expected, but is largely due to tourism, on which Portugal has little influence.

Economics professor João Duque

There have been no significant business settlements or investments, no matter how much the government promotes them. Structurally, hardly anything has improved in the country, says Duque: "The government is more concerned with the redistribution of the non-existent wealth than with finally getting the economy in order."

That could take revenge in the future. The fact that Portugal's high interest rates have not risen any further is mainly due to the European Central Bank (ECB). At least until the end of the year it will pump billions into the crisis countries of the euro area by buying up national debts that are actually worthless. When the program expires, Portugal will probably have to dig deeper into its already empty pockets for government bonds.

However, the government is optimistic: In the course of the year, interest rates would fall again, Prime Minister António Costa recently announced. Then international investors could see that the policies of the socialist minority government supported by communists and the left bloc are taking effect, and that the Portugal model is successful. "We want to pursue responsible policies in 2017 as well," says State Secretary Mourinho Félix, who is responsible for the budget.

There is little leeway

Economist João Duque believes that this is not so easy: In addition to investments, Portugal primarily needs qualified young people in order to solve its economic problem. Attracting those from abroad is even more difficult than keeping Portuguese youth in the country given the low wages. Many young Portuguese flee to other EU countries after completing their studies.

Then there is the pressure on the government, which does not have a majority of its own in parliament. The communists and the left bloc, the two parties that guarantee the political survival of Prime Minister António Costa, are demanding - depending on the mood of the electorate, sometimes louder, sometimes quieter - the renegotiation of the Portuguese debt. That further complicates the situation and scares off potential investors, said Duque: "Going it alone in this area would be a catastrophe for the credibility of our country."

The socialists, who have always rejected a one-sided haircut, are playing for time and hope that the small improvements, especially on the labor market, will be seen by investors as confidence-building. However, the leeway for Portugal is becoming scarce, even if the global economic situation is partly to blame, as the government often emphasizes,

If interest rates continue to rise above the four percent limit, the rating agency DBRS could also change its mind. It is the only one of the big agencies that has not yet rated Portugal's government bonds as junk. If that changes, the ECB will no longer buy Portuguese government bonds either. And borrowing money on the international capital markets would then be unaffordable for Portugal.