ECB warns against a “snowball effect” in the Portuguese debt

  • ECO News
  • 24 May 2017

Risks for the debt sustainability increased because of the rise in interest rates and political uncertainties in many countries. The ECB believes Portugal may come to suffer from a "snowball effect".

Photomontage by Raquel Sá Martins

The European Central Bank (ECB) warned against the risk of a “snowball effect” in the Portuguese public debt, since Portugal will not be able to have enough growth in the next three months to absorb the high financing costs. Without that steadiness, the country is not able to create enough budgetary balance to decrease debt. On the contrary: it will rise to the point where it will create an unsustainable scenario which could create a new crisis.

The majority of the Euro Area members will decrease their public debt by 2018, except for Italy and Portugal. In their Financial Stability Review, the ECB explains the “snowball effect” happens because interest rates are higher than both countries’ economic growth rate between 2016 and 2018. That differential translates to a new public debt which will weight more on the shoulders of those economies, the most indebted in the Euro Area — the said “snowball”.

As for Portugal: in 2017, the economy should grow 1.8%. Along side this increase, it should have a positive primary balance in public accounts, which helps decrease debt by 2.7 GDP percentage points. Still, the Portuguese ratio is harmed by the high costs of the amount of accumulated debt — which presents an estimated average cost of 3.3%. All in all, the ratio will not decrease as much as it could. The IGCP (Portuguese Treasury and Debt Management Agency) estimates a change in this scenario from 2018 onwards, when there will be an inversion of the “snowball”.

Therefore, the ECB concludes: “Moreover, efforts to keep debt dynamics on a sustainable path face headwinds in some countries (i.e. Italy and Portugal) where interest rates are expected to exceed growth, leading to a positive ‘snowball effect’“.