The Portugal situation during the Financial Crisis

Transcription

1 Advances in Managemen & Applied Economics, vol.1, no.1, 2011, ISSN: (prin version), (online) Inernaional Scienific Press, 2011 The Porugal siuaion during he Financial Crisis Milena Lopreie 1 Absrac Today i s frequenly used he erms PIGS or PIIGS, acronyms used by economic journaliss o refer o differen counries of he European Union for heir saemen of affairs. The bad connoaion is eviden from he fac ha pigs in English sugges he bad sae of he economies of hese counries. PIGS has been used a he beginning of he years 1990 o indicae four counries of souhern Europe: Porugal, Ialy, Greece and Spain. Ireland has someimes been added during he year 2007, so he acronym is modified in PIIGS. Neverheless, he alarms of BCE abou he public accouns of hese Saes i seems o exclude Ialy from he group of he counries characerized by very bad saemens of affairs. The aim of his work is o analyze especially during he financial crises he siuaion of he public accouns in Porugal, one of he counries wih greaer difficulies and probably wih he worse condiion if we exclude he dramaic Greek case. In Porugal, he economic growh has been superior o he average UE, for big par of he decade , even if he remains under he 75% of he principal European economies PIL. JEL classificaion numbers: E32, E60, H60. Keywords: business, PIL, economic growh, debs, risk. 1 Deparmen of Economics and Saisics, Universiy of Calabria, Piero Bucci Bridge, Arcavaa of Rende, Ialy, milena.lopreie@unical.i Aricle Info: Revised: April 22, Published online: May 31, 2011

2 112 The Porugal siuaion during he Financial Crisis 1 Inroducion Beginning from 1984, he naion has begun is modernizaion in a sable environmen, and i is unied o he European Economic Communiy in The following governmens have compleed differen reforms and made privae differen governmen firms, liberalizing key secors of he economy, like financial and he elecommunicaions secor. Porugal has developed an economy based on he services, and i has been during he year 1999 one of he welve naions founders of he Euro ha i has adoped in January 2002, ogeher o he oher 11 UE members. The siuaion of he public accouns during he long erm in Porugal as in France, Hungary, Poland and Ialy i is now, however, unbearable wihou considering possible increases of he expense. These fac, is also pu in evidence by he European Commiee in a communicaion on he susainabiliy of he public accouns approved in July To deermine he drasic siuaion of he fiscal poliics of hese Counries, are he deparure s condiions of heir accouns. In he five counries in fac, is he crisis and he suppor o he resumpion ha are leading o a very fas increase of he raio deb/pil, quickly compensaing he progress reached in he las years on he fron of he improvemen of he accouns. These siuaions change beween he counries and hey are deermined in he mos greaer par of he cases from he consequences of he crisis ha i has brough Saes in a higher caegory of risk in he long erm. 2 The dynamics of economic cycle The speculaive episodes ha happened in he las years have very similar characerisics. In fac, when echnological progress occur and improve man life saus, hisory is cyclical wih periods of crisis and recession ha follow periods of boom and expansion. Many economiss ried o analyze he phases ha precede a crisis o individuae he economics waves characerizing pas economic

3 Milena Lopreie 113 courses. The aim of economiss is explain and foresee fuure economic flucuaions. This discussion abou economic cycle i can be exended o financial markes, even if financial markes represen only an aspec of economic cycle. Michell and Burns (2003) define economic cycle like a flucuaion of counry s economic aciviy in which work is organized in firms. In general, economis s analyses are abou growh of gross domesic produc, flucuaions of prices and of ineres raes ec. The inersecion of hese phenomena produce upswing or downswing and hese siuaions influence financial marke s course. So, economic cycle s heories can be subdivided ino wo caegories: Exogenous heories: They sudy he causes of flucuaions ha are exernal o he economic sysem; Endogenous heories: They sudy he causes of flucuaions in he economic sysem. In he Figure 1 we can see he graphical represenaion of economic cycle in which i s observed a general course of producion in upswing and downswing. Producion Trend Peak Flow Time Figure 1: Economic cycle If we look he Figure 1, we can noice ha every flucuaion begins from he floor a minimum poin of economic aciviy ha represens deparure poin of upswing up he peak of economic cycle o which follow a downswing. To analyze

4 114 The Porugal siuaion during he Financial Crisis he crises is imporan o observe pas values because if here is a linked beween curren value and pas value hen fuure value are predicable (deerminisic series). In general, ime series are sochasic so, only a lile par of hem can be explained by flucuaions of pas variables. We can represen ime series (G) like: G= T+S+C+R In which: T: I s he rend or paern in which a phenomenon evolves in he long period. I poins ou he poenial income of he economy for example, he middle rae of period s growh; C: I s he cycle componen like flucuaions linked o upswing or downswing. I s he way according o he economy grows around he rend; S: I s seasonaliy and i s represened by flucuaions ha are regularly repeaed in a cerain period; R: I s he casual componen or residual componen. I represens, for example, sochasic flucuaions. In he Figure 2 here is a more complee descripion of economic cycle. Producion Exension Trend Resar Upper urning poin Lower urning poin Downswing Period Time Figure 2 : Economic cycle The economic sysems, in fac don have a linear developmen, bu raher disconinuous. The economy grows, around a middle value, like in he Figure 2,

5 Milena Lopreie 115 hrough phases of inense aciviy and phases of depression. The disconinuous course around a linear rend is eviden in he Figure 2. The disconinuous course of he economy along is growh pah i is said economic cycle, because i is characerized by phases of expansion (when he economy grows above he value of he rend) and of recession (when i grows below rend s value). Boh componens of he economy are relevan. The growh is very imporan because i measures he available resources for he colleciviy. The imporance of he cycle is less clear, bu hey are associaed coss o boh he expansion and he recession. In downswing, he enerprises don assume, and we can observed high unemploymen raes and he social problems o hem conneced. Oherwise, if he economy grows and we are in a upswing phase we can observe high inflaion and he coss ha derive from his siuaion; he inflaion, in fac, reduces purchase people s power, i has negaive effecs on he disribuion and i causes high ineres raes. Conneced siuaions wih he insabiliy of marke s economies, like unemploymen, inflaion, underdevelopmen, represen failures of he macroeconomic marke, due o he presence of inefficiency and hey can be explained by he macroeconomic heory (Acocella, 2006). The aim of economic policy is o solve hese problems; so we can simplify individualizing wo main objecives: Growh s rae medium mus be high; The variabiliy of he economic cycle mus be reduced, or i mus be reduced he oscillaions around he rend o decrease he coss associaed o he expansions and he recessions. In general, we can define hese macroeconomic policies like long erm s policy (he policies ha have effecs on he growh) and policy of shor erm (he policies ha have effecs on economic cycle s course). Long erm s policies are abou o he suppor of he innovaion, o he growh, and in general for he efficiency and hey concern, for example, he composiion of he expendiure s governmen, he regulaion of he markes ec. Shor erm s policies are insead he moneary policy

6 116 The Porugal siuaion during he Financial Crisis and he fiscal policy. Neverheless, here are very differen heories abou economic cycle and he policy s role. For example, he Ausrian economiss underlines ha an excessive expansion of banking credi and he manipulaion of ineres raes by he moneary auhoriies is he cause of crises and crash. Oherwise, classical economiss following Say s law, underline ha he markes are always in a marke clear condiion and he inervenions of policy are no necessary. Finally, he moneariss explain ha he oscillaions of economic cycle depend on banks loans decisions. If, banks have excess of liquidiy hey increase credi supply and decrease loan s ineres; so here is an expansion of producion and invesmens. Bu he increase of credi supply reduces banks reserves hen loan s ineres increase, credi supply decrease, producion and invesmens decrease. Credi reserves produce an inversion of he economic cycle. 3 Analyical analysis The increase of credi supply reduces banks reserves hen loan s ineres increase, credi supply decrease, producion and invesmens decrease. Credi reserves produce an inversion of he economic cycle. We observe he siuaion of he accouns in Porugal. We analyically can see he forecas ha we can do for he Poruguese public accouns in he long period. The daa used, are of Eurosa daabase 2010 and hey are repored in he following able: Table 1: Eurosa daa repor for Porugal in he year 2010 B() () b() Eurosa d() In which B() is he nominal value of he naional deb, () is he PIL, b() is he raio public deb/pil and d() he raio defici/pil. The OCSE (Organizaion for

7 Milena Lopreie 117 he Cooperaion and he Economic Developmen) daa for he nominal ineres rae (i) and he inflaion rae in he years considered are repored in he Table 2: Table 2: Expeced inflaion and ineres raes for Porugal in he year 2010 Expeced inflaion i From he daa ha we have available i can easily be found he real ineres rae (r) and he variaion rae of he PIL (g): Table 3: Real ineres raes and PIL growh rae for Porugal in he year 2010 r g We know also ha r = ineres rae - expeced inflaion, while [() ( 1)] g =. ( 1) We assume, now, ha is no moneary financing. We know ha he raio deb/pil in he long period can be express by his raio: B = ( 1+ r g) B 1 1 G T + If we apply o our daa we obain he resuls in Table 4. We can see hen ha he daa are no so differen from hose observed. We now see a possible conainmen s poliics of he raio public deb/pil. We suppose ha he Poruguese governmen wans o mainain in 2010 a value of he raio public deb/pil equal o he value of he raio public deb/pil during he year 2009: b(2010) = 76,8

8 118 The Porugal siuaion during he Financial Crisis Table 4: Daa elaboraed wih he new assumpions for Porugal in he year B() () b()eurosa d() Infl.exp i r g (1+r-g) b() esimaed We wan o see wha value has o assume he raio defici/pil d(), where: d () G T = In which G T is he defici or primary defici. We suppose ha he inflaion has negaive sign and i s equal o -1% on annual base so he expeced inflaion is equal o -1%. We hypohesize ha also he growh rae of he PIL in 2010 is negaive: g (2010): -2% as i regards he nominal ineres rae we make a mean of he raes of he preceding years: i (2010): 4,27% The siuaion will be as presened in Table 5. If i is waned o mainain a consan raio deb/pil in 2010 he Poruguese Governmen mus have a primary advance equal o he 5,6% of he PIL. Therefore he raio defici/pil has o be equal o -5,6%. Since d() i is defined as: So his fac means ha: G < T d () G T =

9 Milena Lopreie 119 Table 5: Daa elaboraed wih he new assumpions for Porugal in he year B() () b()eurosa 0.76 d() Infl.exp i r 0.05 g (1+r-g) 1.07 b() 0.76 esimaed For he calculaion is used he inverse formula given from: G T = B ( 1+ r g) Since he primary defici is defined as G()-T(), where G() is he governmen expendiure in good and services in he year and T() are he axes subracing he ransfers a he ime, his resul can be achieved decreasing he governmen expendiure in considerable way or increasing he axes. A remarkable reducion of he governmen expendiure i is no possible for he difficuly o reach his objecive, for he necessiy o susain he naional economy in a siuaion of recession like he acual siuaion. An alernaive could be he increase of he axes, bu also in his case we have analogous consideraions: wih he recession in acion a conspicuous increase of he axes could be wrong, also for he fac ha he disposable income would reduce provoking a reducion of he consumpions, and herefore of he naional produc. We can conclude ha under he curren economic condiions i is difficul for Porugal sabilize he raio deb/pil during he year We can analyze he case in which he raio defici/pil is zero for: d(2010): 0% Since d() i is defined as: B 1 1

10 120 The Porugal siuaion during he Financial Crisis In his case: d () G T = G = T We consider for he oher variable he preceden hypoheses. We analyze how in his case change he raio deb/pil : Table 6: Daa elaboraed wih he new assumpions for Porugal in he year B() () b()eurosa d() 0 Infl.exp i r g (1+r-g) 1.07 b() 0.82 esimaed Then b() = 82,4% of he PIL. I can be affirmed, gives he obained resul, ha he dynamics of worsening of he public accouns condiions depends on he conraced deb in precedence. In fac mainaining a siuaion of primary balance during he year he dynamics of he accumulaed deb also worsens. We know ha, for he naional deb, considering as uniy of ime he year, his relaionship is: ( ΔB / P) = G T + INT ( ΔBM P) / Where G() and T() represen he quaniies specified in precedence, INT is he expense for affairs on he naional deb, while Δ BM / P and Δ B / P hey respecively represen he variaion of he sock of moneary base and he naional deb deflaed for he general level of he prices P. Since, he moneary financing is

11 Milena Lopreie 121 no possible for he counries of he SME and we has assumed primary balance, he deb can grow only if grows he ineres maured on he sock of preceding deb (INT). Assuming primary balance and absence of moneary financing, he ineress maured on he sock of preceding deb are equal o he produc of he ineres rae (i) and B ha is equal of ib. The growh rae of he naional deb is equal o ib/b, or o he ineres rae i. Therefore in our case: i [ ΔP / P] [ Δ / ] > 0 Bu i Δ [ P/ P] is he real ineres rae, ha we have indicaed as r, while [ Δ / ] is he PIL growh rae in consan prices, ha we have indicaed wih g. So, we can say ha, wih a primary balance and absence of moneary financing, he raio deb/pil grows if r>g. In our case: r = 0,05265 and g = - 0,02 r is greaer han g, so he raio deb/pil increases. We can consider anoher hypohesis abou he primary defici in relaionship o he PIL of 2010 in he Iberian counry. We suppose ha: d(2010): 6% We know ha d() i is defined as: This means ha: d () G T = G > T We mainain valid he precedens hypoheses. We will evaluae how change he raio deb/pil in his case(see Table 7). Therefore b() = 88,4% of he PIL. The hypohesis of a raio defici/pil in 2010 equal o 6% conducs o a raio 88,4% deb/pil. I s an hypohesis, herefore, very realisic, given he knowledge ha we have on he course of he economy. Wih an

12 122 The Porugal siuaion during he Financial Crisis imporan defici as ha considered, Porugal has he possibiliy o susain he economy in he hope of a recover and has also he possibiliy o mainain consan he fiscal imposiion avoiding o penalize he consumpions, and he naional produc, because for a disposable income of he families oo low. Obviously, an economic poliics of his ype canno be exended for many years. The risk, in fac, is a oal crash of he economic sysem because for a more conrollable dynamics of he naional deb in he long period. Table 7: Daa elaboraed wih he new assumpions for Porugal in he year B() () b()eurosa d() 0.06 Infl.exp i r g (1+r-g) 1.07 b() 0.88 esimaed 4 Conclusion In his work we wan o pu in evidence ha he governmens have o keep on susaining he economy and hey are necessary consolidaion s sraegies of he accouns for efficien poliical inervenion in period of economic crisis. The measures o grow he confidence and o susain he demand hey can be successful only if hey are perceived from he markes and from he public opinion as emporary and compaible wih he susainabiliy of he accouns on he long erm. A key facor of he exi sraegy o which i is working o European level. The sraegy of consolidaion of he accouns i is founded on hree facors: reducion

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