Portugal’s Illness, EU’s Debt Crisis, and ODA


Becoming Ill without A (Good) Doctor:

With the resignation of Prime Minister José Sócrates on March 23, Portugal looks to be the third eurozone nation primed for a bailout.  Prime Minister Sócrates, of the Socialist Party, resigned after his minority government lost a parliamentary vote on austerity measures.  This was the fourth and “latest proposal for spending cuts and tax hikes.”  The austerity measures were to include: “public-sector wage cuts and hiring restrictions, pension reform and increases in public fees.”    The failed vote brings Portugal ever closer to being the next of the P.I.G.S to require financial assistance.

The Economist reported that Portugal, “is close to the moment when it has no alternative but to seek help from the European Financial Stability Facility (EFSF), the euro zone’s bail-out fund.”  The EFSF, which has already been part of the Ireland bailout, to the tune of €3.6 billion, raises money in capital markets “to finance loans for euro area member states which are experiencing difficulty in obtaining financing at sustainable rates.”  Portugal, which is facing raising yields on its 10-year government bonds (7.9%), must pay $6 billion in April to finance its deficit.  The concern for Portugal, at least in regards to the rating agencies whose down gradings affect interest on bond repayments, is that if the country must access official assistance from the EFSF, government bond holders will be forced to accept losses or the prospect of low recovery values.  The immediate result of downgrading Portuguese bonds is that the country would have to pay more to borrow money.

To add to the problem, Portugal may suffer through the next several months with a handicapped government that is lacking a leader at the helm.  The Prime Ministers resignation has “created a political vacuum in which nobody may have enough authority to negotiate any bail-out.”  A lack of leadership and, at the very least, a perceived lack of organized direction for dealing with the countries financial hurdles only fuels a growing lack of confidence by investors.  As uncertainty grows in the government’s ability to manage its growing deficit and as interest rates on its borrowing climb, Portugal’s ability to provide aid and Official Development Assistance (ODA) could be problematic.

Managing a Virus while Providing Medicine to Others:

The European sovereign debt crisis has had broad implications on aid giving to developing countries.  A Market Brief by the African Development Bank Group discussed the potential of continued slashes in European governments’ spending, due to the sovereign debt crisis, leading “to declines in aid to developing countries”.  The effect of ODA during the recent recession, and on-going recovery, was previously commented on by the CGP in European Crisis = ODA Crisis?.

Portugal, which is influenced in its “development co-operation” by its historical roots, plays a significant part in development assistance to a number of  African states.  Its six priority partner countries, which include five African states, are: Angola, Cape Verde, Guinea Bissau, Mozambique, Sao Tome and Principe, and Timor-Leste.  These priority partners receive over 70% of Portugal’s bilateral aid.  The OECD press release for Portugal’s (2010) Peer Review notes that the “focus on fragile and least developed countries means that Portugal is involved in some of the most challenging and important issues in international development”.

Portugal has  had trouble meeting its ODA volume commitments for aid though.  In 2009 ODA dollars fell to $513 million, which were down from $620 million in 2008.  To put this in perspective, if Portugal were to meet the 0.7% GNI benchmark by 2015, it would have to triple ODA according to the Portugal (2010) DAC Peer Review.  With the looming potential bailout, climbing interest rates, and harsh deficit reduction cuts, Portugal’s ODA could suffer further next year or at the very least, not increase.

Here are the total official and private development aid flows for Portugal (in USD):

  • ODA Flows – (2007) $471m: (2008) $620m; (2009) $513m
  • Private Capital Flows – (2007) $1,980m; (2008) $906m; (2009) $692m

Private flows still exceed official development assistance, but both flows declined in 2009.  It will be interesting to see how these flows will be affected by a looming bailout and the requisite economic restructuring attached with assistance.  European leaders believe that “Portugal may need in excess of $100 billion to keep functioning while it restructures its economy”.  After Ireland received assistance, the Council of the European Union “recommended” that Ireland: “put an end to the present excessive deficit situation by 2015”; “bring the general government deficit below 3% of GDP”; “adopt… binding multi-annual ceilings on expenditure[s]”; and “pursue reforms to the social security system”.   Ireland’s total official and development aid flows (in USD):

  • ODA Flows – (2007) $1,192.15m; (2008) $1,327.85m; (2009) $1,005.78m
  • Private Capital Flows – (2007) $4,329m; (2008) $4,500m; (2009) $3,000m

Manuel Correia, President of the Portuguese Institute for Development Support (IPAD), said “there has been no reduction in the… aid handled by IPAD” for Portugal in 2011.  IPAD, the Portuguese governmental entity created in 2003 to streamline the coordination of development cooperation between fragmented governmental departments and institutions, falls under the Ministry of Foreign Affairs.  It leads the Portuguese engagement with the EU on development issues and manages multilateral partnerships.

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