THE troika wishes to convey that Portugal will be just fine, thank you, provided they keep at it:
The programme is on track, but challenges remain. Policies are generally being implemented as planned, and economic adjustment is underway. In particular, the large fiscal correction in 2011 and the strong 2012 budget have bolstered the credibility of Portugal's front-loaded fiscal consolidation strategy. Financial sector reforms and deleveraging efforts are advancing, while steps are taken to ensure that credit needs of companies with sound growth prospects are met. Reforms to increase competitiveness, growth, and jobs have also progressed, although many reforms still await full implementation. The broad political and social consensus that is underpinning the programme is a key asset.
Looking ahead, the Portuguese economy will continue to face headwinds. In 2012, trading partner import growth is expected to weaken further, while domestic demand adjusts, and unemployment and bankruptcies are rising. As a result, GDP in 2012 is expected to decline by 3¼ percent, following a fall of 1½ percent in 2011. In 2013, a slow recovery should take hold, mainly supported by private investment and exports. External adjustment is proceeding.
Here's a graphic representation of the establishment of fiscal credibility:
That large drop in early February corresponds to the adoption of Portugal's strong 2012 budget. Wait, strike that, the large drop in early February corresponds to a flood of European Central Bank money. I'm sure the drop from renewed fiscal credibility is in there somewhere; kindly point it out in comments.
The IMF reckons Portugal's debt load will stabilise around the arbitrary yet all-important 120% of GDP threshold. At least some private forecasters anticipate the possibility of a peak at a much higher level. What seems clear, however, is that Portugal can't afford any nasty surprises from the resolution of the Greek debt mess. That sort of thing could have a serious negative impact on the government's hard-won credibility.
