Teodora Cardoso: “A debt relief” would not solve Portugal’s problem

  • ECO News
  • 6 July 2017

Teodora Cardoso, head of the Public Finance Council, warns against Portugal's debt problem, which she says cannot be solved by a debt relief or by "policies which only concern the budgetary deficit".

Teodora Cardoso, CFP, 2016. MIGUEL A. LOPES/LUSA

“Portugal is inevitably confronted by the demand of adjusting its institutional framework”, stated Teodora Cardoso in the publication called Budgetary Policy within the Economic Policy Framework, disclosed this Thursday.

This publication is an innovation from the Portuguese Public Finance Council (CFP) and it discusses the need to have a new economic and budgetary policy, recalling Portugal’s entrance in the Euro Area. Teodora Cardoso’s opinion is that Portugal will not solve its structural problem with a debt relief, which would just postpone the adjustment the country needs. She argues the external financing needs continue and both creditors and banking trust would be questioned.

CFP’s president classifies Portugal’s entrance in the Euro as “a new shock” on the Portuguese economy which “seemed to have solved all issues“. Nonetheless, in Teodora Cardoso’s analysis, this space was used to prioritize short term growth, ignoring structural policies to increase the economy’s competitiveness and productivity. It was also the entrance in the Euro Area that allowed an indebtedness level towards foreign countries to be reached, “which had never been reached before”.

“Private sector’s indebtedness increased very quickly […], while external deficit increased, as well as external debt”, is stated in the document. The publication also refers to the economy’s structural competitiveness, which “only benefited marginally” from that space. As a result, the economy “almost stagnated”, employment decreased and indebtedness ratios reached “historical maximums”. This is the context in which the Portuguese economy shows its “vulnerability” when hit by an international financial crisis.

About Portugal’s current situation, Teodora Cardoso considers that “even any type of debt relief would not solve the country’s issue”, given that the reduction would “only postpone and make the adjustment the economy needs more difficult”. In her analysis, Teodora Cardoso states that external financing needs continue existing and that two problems have been created: one concerning external creditors’ mistrust, and another concerning the soundness of the Portuguese banking sector. The document further explains that an “adequate” institutional adjustment needs to be made as well as a “revision of the economic policy”.

“Portugal is inevitably confronted by the demand of adjusting its institutional framework and its corresponding governance mechanisms”, is Teodora Cardoso’s conclusion. Since the country was “unable to take advantage of the positive shocks to introduce and consolidate the reforms it needs”, Portugal is destined to have an “excessive indebtedness” and “mediocre results in economic and employment growth”. “That adjustment and its impact in the economy depends on a solution for the problem of debt, and not on the forced decrease of these policies which just regard the percentage of the budgetary deficit”, is the advice given by Teodora Cardoso, head of CFP.