Portugal's bank failure is wiping out its bailout gains

After three long and arduous years of painful austerity policies, Portugal exited the international bailout programme in May of this year. The Lisbon government congratulated itself on its great success, with the deputy prime minister Paulo Portas dramatically comparing the restoration of Portugal’s financial sovereignty to the restoration of its independence from Spain in 1640.

But as was apparent to most commentators, all was far from rosy. The crisis of confidence that had brought Portugal to the brink of bankruptcy in 2011 had indeed been overcome, but the economic data since May have been far from promising. Most worryingly of all, public debt has continued to rise alarmingly – now standing at over 130% of GDP –, while overall growth remains sluggish.

One of the major problems has been the government’s inability to bring about any significant structural reforms. Portugal’s prime minister Passos Coelho’s vaunted plans for the ‘reform of the state’ still haven’t even made it off the drawing board.

Under pressure from the bailout Troika, the deficit has come down, but this was mainly achieved by selling off profitable state assets like airports and the post-office, and by taking a hatchet to budget spending. It’s going to be more difficult to sell off the less attractive state-owned companies, while the budget cuts were achieved by often unconstitutional quick-fix measures of a more or less temporary nature. It is looking dangerously possible that the Troika-inspired ‘reform process’ will peter out now that the bailout programme has been exited, particularly since elections are just around the corner.

But that’s not the worst of it. The man in the street has been very patient over the past three years, stoically accepting sacrifices and apparently convinced by the government’s version of events, which has been a carefully constructed ‘narrative’ that the crisis is primarily due to decades of overspending on social policies. This justified massive cut-backs in social programmes, in education, in medical care and in pensions. But, in August the financial crisis once again reared its ugly head, with the surprise failure of the country’s largest lender, the Espírito Santo banking group.

As newspapers reported around the world, the government was forced overnight to pump almost €5bn from the remaining bailout funds into the bank. Very worryingly, the regulators had apparently been hoodwinked by the bank’s administrators and nobody in Portugal or abroad had seen the crash coming. The immediate knock-on effects are significant, particularly for small investors who in early 2014 were encouraged by the government to plough their savings into the bank’s recapitalisation. They have lost everything, while the medium and long-term consequences of the scandal for the political establishment and, of course, for the overall economy have yet to be felt. Filling the hole in the Espirito Santo banking group’s finances will hurt Portuguese taxpayers, but it also means that the government’s ‘narrative’ must again be tweaked. This time it will probably blame duplicitous bankers for the country’s woes, absolving the government of its obligation to introduce the long-overdue ‘reform of the state’.