The Portuguese story

After Greece, Portugal is together with Italy and Spain the country with the highest ratio of government debt to GDP, over 130 percent at the beginning of 2014 as compared to 94 percent in the euro area as a whole (and a maximum of 60 percent according to the Maastricht criteria). Also, its competitiveness (relative unit labor cost) decreased since the formation of the euro area by 20 percent in relation to Germany, just like Spain and only slightly less than Italy. The budget deficit increased sharply in 2009 to 10 percent of GDP and the unemployment rate rose from 7 to a maximum of 18 percent before falling back somewhat.

What sets Portugal apart from some other PIIGS countries is firstly that just like Greece and Italy but in contrast to Spain, it already had a high debt ratio to begin with, 70 percent in 2008 as contrasted to Spain's 40 percent. Secondly, as was seen above in Figures 17 and 18, a much larger share of the government debt of Portugal was held by foreigners than in Italy or Greece. This means that the government has less control over the situation and must respond more quickly.

Hence the Portuguese government had little alternative but to demand a bail-out from its European colleagues when Moody's lowered the country's rating two notches to A1 in July 2010, by another three notches to Baa1 in April 2011 and by another four notches to Ba2 (i.e. “junk”) in July 2011. In the agreement with the “troika” from 5 May 2011, 12 billion euro out of the 78 billion euro granted in aid from the IMF and the two EU Financial Stability funds would be used to recapitalize Portuguese banks, according to the agreement. Banks would have to attain a 9 percent core Tier 1 ratio by the end of 2011 and 10 percent by the end of 2012.

In December 2011, the European Banking Authority (EBA) published the amount of capital required for the EU banks in order to fulfill a core Tier 1 capital adequacy ratio of 9 percent. For Portugal this amounted to 7 billion in total and the figures shown in Table 16 for the major banks (in billion euro).

The first column represents the capital needs calculated by the EBA.