Former poster child Portugal is coming under renewed pressure from the IMF to make deep spending cuts amid the highest overall debt levels in the EU, concerns about job creation and rising ‘bad’ non-performing loans. Barely a year after a much trumpeted exit from the Troika’s punishing three year adjustment program. But Portuguese economist Ricardo Paes Mamede*, author of a new book Que fazer com este país, um retrato da crise portuguesa, (“What to do with this country, a portrait of the Portuguese crisis) argues that austerity must be ditched for growth and fetters imposed on the out-of-control banks. And he suggests the singular focus on the size of the public debt is ideologically driven. Below is a translation of an interview given to O Publico newspaper.
The Croatian government has created legislation to eliminate a portion of the private debt of its citizens. In Portugal could, or should, a similar measure be considered?
There exists in Portuguese law mechanisms to deal with such situations – I am thinking of individual insolvency proceedings and the request for dismissal of the remaining liabilities. In these cases, there is no immediate elimination of debts, but it can happen if it is established that there is no ability to pay on the part of individuals. The principle seems to me reasonable, but I know of no comprehensive review of the implementation of these measures.
This debt restructuring may have some positive effect on the economy?
As far as I can see, the measure in Croatia is focused on people with very low incomes who have no property or savings and who got into modest amounts of debt. Thus, their impact on the economy is necessarily modest.
And from a social point of view?
The perpetuation of debts of families and individuals greatly limits the possibility of a decent life. Most of the time, if the poorest segments of the population are getting into situations of suffocating debts there must be major flaws in market regulation. In these circumstances, the elimination of debts is an adequate and fair measure. However, the phenomenon only has a major impact if economies are in a very weak situation. Rather than eliminate debt of those with few resources, what is really important is to restart the economy and create jobs.
The main stimulus to home ownership was the sharp decline in real interest rates in the second half of the 1990s. In Portugal we barely speak of private debt and focus all the attention on the public debt. Why?
Long before there was a public debt problem in Portugal we had a very serious private debt problem. In my book “What to do with this country,” I try to show that the budgetary problems in Portugal are much more a consequence of the economic crisis that has taken place in Portugal since 2000. However, part of the tradition of right-wing parties is to attack the “profligacy the state” and make this their flagship policy. In Portugal there was bad budgetary decisions taken by various governments, but there are other bad decisions that were much more significant for us to get to the state we are in.
The structure of private debt in Portugual reveals the great burden of housing loans …
The main stimulus to home ownership was the sharp decline in real interest rates in the second half of the 1990s and the increase in the real income of the population in the period. There are other relevant factors – the stagnation of the rental market, the lack of a rent controls for new housing in urban centers, tax incentives for the home purchases – but the evolution of interest rates was the deciding factor.
The existence of a serious debt problem results from the credit expansion in the years before the crisis?
To speak of over-indebtedness it is necessary not for credit to expand rapidly, but also that the economy fails to grow at the levels to ensure that debtors can pay their debts. This happened in Portugal since 2000. In the nineties the country went through a process of unparalleled privatization and deregulation of the financial sector, while foreign capital flows were liberalised. This led to the largest increase in credit to the private sector recorded in the EU in that period.
By 2000 we had very high levels of private debt. To make matters worse, the country suffered a succession of competitive shocks – trade, foreign exchange and energy – between 2000 and 2008. It is the combination of these factors explains the private indebtedness before the onset of the current crisis.
The domestic financial sector borrowed from northern European banks and lent this money at a higher price, to the building contractors, who built the houses, and families, who bought them. Has this now ended, or do we still run the risk of a housing bubble?
Technically, there was no real estate bubble in Portugal. The rate of increase in real estate prices was, after all, far short of what happened in Ireland or Spain. In any case, the risk of private indebtedness is typical of economies where the financial sector has a great weight and is insufficiently regulated. Unfortunately, this situation has not changed, although the fragility of the balance sheets of Portuguese banks means a new credit boom in Portugal in the coming years is unlikely.
The only way to sustainably reduce the private debt problem is to make the economy grow.In the Portuguese case, what are the ways to overcome the problem? Act on the housing market? Impose controls on banking? Forgive part of the mortgage debt above a certain amount, as a proportion of the value of houses?
The only way to sustainably reduce the private debt problem is to growth. Hence it is so important to reverse the austerity strategy: while we insist on forcing public spending cuts in a context where households and businesses are saving to pay past debts, the result is economic stagnation, which will not solve any debt problem. For reasons that are more social than economic it is also important to strengthen regulation of consumer credit, to prevent abuses by the credit institutions. As for the mortgage debt, I believe that families who are forced out of their homes should be automatically freed from debt to banks, while I recognize that full
implementation of this principle in the current context would create financial problems that are difficult to solve.
Access to cheap credit also helped to maintain “social peace” from the late 90s? Creating the belief that families had more resources?
I would not say it contributed to social peace, in that 3/5ths of the population has no access to credit and this corresponds generally to the most disadvantaged segments of the population. But it is true that access to credit contributed to much of the middle class assuming as a given that the Portuguese economy would be able to continue growing at a rate it had done until 2000. Today we know that it is not so.
The crisis created a near unanimity of opinion that there needed to be controls over the financial sector. Seven years later, has this come about?
The world economy has lived for eight years the aftermath of an unprecedented financial crisis as a result of deregulation and liberalization that ruled for over three decades. Having regard to the huge economic and social costs of this crisis, it is shocking how little has been done to restrict the devastating power of liberalized finance. There have been some improvements in the regulation of financial products, in supervisory rules and limits on leverage. However, the forces that led to the financial crisis of 2007/2008 remain fundamentally untouched.
*Professor of Economics at Lisboa School of Economics and Management (ISEG), a former director of the Economic Analysis and Forecasting Office within the Ministry of Economy and Innovation
O Publico
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