Portugal intends to leave the European bailout scheme in May without any transitional help and precautionary credit line. The country is currently able to stand on its own feet. But how long will the recovery last?
It sounds like good news: Portugal plans to exit the European bailout program later this month. With this step, the country has outperformed the international donors' initial expectations.
Portugal has received loans worth more than 78 billion euros ($108 billion) from the troika - the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Commission - since May 2011. In return, the Portuguese government had to implement tough austerity measures, reduce public debt through spending cuts and eliminate barriers to growth. Furthermore, Lisbon had to undertake steps to boost domestic consumption and reduce unemployment.
These measures seem to be successful in turning around the fortunes of the country: The economy grew by 1.6 percent in the final quarter of 2014, a higher rate than in any other eurozone member state. Prospects also remain good for the current year, with the ECB estimating a growth rate of 1.2 percent.
While unemployment fell by two percentage points during this period, exports rose by 24 percent - a 40-percent share of the nation's gross domestic product (GDP) - and 13 percent higher than the corresponding figure in 2008.
Debt crisis over?
Portugal is the third country after Ireland and Spain to exit the European bailout scheme. In a televised address on May 4, Prime Minister Pedro Passos Coelho announced that the government will emulate Ireland and make a "clean" exit from the rescue mechanism without any transitional assistance and the safety net of a precautionary credit line. "We have financial reserves for a year that will protect us from any external turbulence," Coelho said.
According to Jörg Krämer, chief economist at Germany's Commerzbank, this development means the European debt crisis is nearly over, as it has become "relatively easier" for problem-stricken countries to find investors willing to buy their bonds. Portugal has also regained competitiveness as wage excesses of the past - similar to those in Spain and Ireland - had been reversed, Krämer told DW.
Furthermore, Lisbon is in a "strong position to finish consolidating its public finances," said IMF chief Christine Lagarde. German Finance Minister Wolfgang Schäuble also praised Portugal's efforts saying that the country has "had been incredibly successful at being able to finance itself again."
Krämer says he is confident that the country will be able to finance itself without a precautionary credit line, as "there are enough investors willing to buy Portuguese government bonds, even without the implicit backing of the taxpayer."
Long-term growth uncertain
However, it remains to be seen whether the current stability can be sustained in the long-term. While Ireland had around 20 billion euros built up in its treasury at the time of its exit from the bailout program, the Portuguese reserves are much smaller.
In addition to that, private households and businesses are often highly indebted.
In order to keep their capital ratios at constant levels, Portuguese banks have been reluctant to lend. At the same time, companies have been struggling to find capital for major investments, which could dampen economic growth in the long-run.