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Portugal Struggles Against Austerity, Debt

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If there’s one country keeping a close eye on what’s happening these days in Greece, it is Portugal.

Bailed out by the European Union and the International Monetary Fund in 2011, Portugal has been waging its own battles with austerity, high unemployment—particularly among its youth—and mandated debt reduction. It too has grown disenchanted with belt-tightening measures imposed for years on end, and despite being held up as an example of success in conquering its financial woes, the country has begun to question the necessity for prolonged harsh measures.

Portugal

Portugal successfully exited its bailout in May of last year, but changes to its labor markets and legal systems, among others, that were imposed at the behest of its lenders have been wildly unpopular, with protests and demonstrations expressing the dissatisfaction of Portuguese voters.

In March a fresh wave of demonstrations rocked the country as Prime Minister Pedro Passos Coelho was accused of failing to pay his own taxes on time. And with elections to be held later in the year, the government’s insistence that it plans to continue to impose strict financial conditions is making people think twice about who they plan to vote for.

That said, Portugal’s economy has been growing, with the Lisbon-based National Statistics Institute saying at the end of May that the country’s GDP rose 0.4% in the first quarter of the year on increased investment and household spending. But considering that the unemployment rate rose for the second quarter in a row to 13.7% during Q1 2015, and exports—which were projected by the government to help fuel growth in the Portuguese economy this year—fell 0.3% for the quarter, it’s a very mixed picture.

In May, the Bank of Portugal warned that the country’s banks had high exposure to both government bonds and the real estate sector, and that presents a risk to financial stability. In its latest report on financial stability, the bank warned investors to “pay attention to the impact of a possible abrupt reversal of market sentiment” in debt markets.

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At the end of 2014, Portuguese banks held more Portuguese government bonds than they did in 2013—the equivalent of 8.3% of their assets, compared with 2013’s 7.5%. And that could cause problems should investors turn against Portuguese bonds. It warned that in spite of the European Central Bank having an asset purchase program that could step in, the high concentration of government bonds among the banks’ assets “currently assumes special importance.”

Fitch Ratings, for its part, said in June that investors’ growing interest in Portuguese banks is an indication that the sector is stabilizing. “Our portfolio review of Portuguese banks, completed on 19 May, highlighted that asset quality indicators are gradually stabilizing and the banks are returning to profitability, supported by improving macro-economic trends,” the company wrote in research.

All that said, Portugal is getting at least one shot in the arm from China, via Utility Energias de Portugal (EDP), one of whose shareholders is China Three Gorges (CTG), operator of the largest hydroelectric plant in the world. The two companies have set up a joint venture for the development of hydroelectric projects in Africa and South America, and the arrangement is regarded as an indication of how China will invest in renewable energy outside its own borders.

When CTG bought its 21% stake in EDP back in 2011, it paid 2.7 billion euros ($3.01 billion) for the privilege, topping bids by Eletrobras of Brazil and E.ON of Germany. And at the time it made a commitment to invest 2 billion euros in projects to be led by EDP.

Among some of the hydropower projects being considered by the 50-50 joint venture, called Hydroglobal, are operations in Peru and other ex-Brazil Latin American countries. Mozambique and other Portuguese-speaking African countries are also on the list.

EDP, for its part, intends to invest 1.2–1.3 billion euros within the next year in projects that CTG will participate in, to the tune of some 300–400 million euros, either via co-investment or the purchase of minority stakes.

With China seeking to up its Eurocentric investments, the EDP venture is not its only foothold in Portugal. In 2012, State Grid Corporation of China bought 25% of Portuguese grid operator REN.