International Monetary Fund analysts reviewing Portugal’s bailout this summer had plenty to fret about. The country was going to miss its deficit target for the year, a surge in exports was losing steam and recession was deepening — all in all, a recipe for trouble.
But in those dark clouds, the analysts noticed a silver lining. After two years of budget cutting and economic reform, Portugal’s ability to get loans from private investors had begun to improve and its borrowing costs had declined.
As a result, IMF officials would not demand that the Portuguese government make further spending cuts or impose more austerity measures, which could push the country deeper into recession and risk a political backlash. Instead, the IMF decided that the country could safely borrow a little more and make up the difference over time.
This was a small concession in a long-running euro-zone crisis that has required trillions of dollars in emergency international support to keep the currency union intact. But the IMF’s move was also a sign that the riskiest phase of the crisis may have passed, and that international investors are gradually gaining faith that the 17-nation currency union won’t crack apart or trigger a global financial meltdown.
“We are probably over the worst,” Thomas Mayer, former chief economist for Deutsche Bank, said in remarks at the Atlantic Council in Washington this week.
He pointed to two recent initiatives that may have helped ease the turmoil: a proposal for a European banking union and a plan by the European Central Bank to keep down the borrowing costs of stressed governments by buying their bonds.
“Finally, the rescue helicopters are there,” Mayer said. “The injured are all bandaged and shipped out to surgery. So far, no one has died.”
Neither of the programs has taken off yet. The banking union is proving harder than expected to put into practice, though the plan remains to launch it next year. The ECB is waiting for any government to apply for the bond-buying. Analysts expect that Spain is nearing the point where it will request ECB support.
But some officials and market analysts say that the programs could restore investor confidence even before they start.
There are indications of improving confidence in Europe’s struggling states. Bank deposits in Spain and Greece crept higher last month, reversing a downward trend that could have led to a banking crisis and doomed the euro zone. Across the euro zone’s network of central banks, an internal measure that reflects cross-border flows of money began to reverse in September after months in which the German central bank had accumulated vast claims against central banks in Italy and Spain.
In Greece and Portugal, deficits with the rest of the world have shrunk faster than expected this year — meaning both countries are less reliant on the flow of money from outside and are a step closer to self-reliance.
In Portugal’s case, “they are doing a nice job of gradually rebuilding the investor base . . . and the broader euro-area environment has improved,” said IMF Portugal mission chief Abebe Aemro Selassie. The IMF this week approved the latest bailout payments to Portugal and Ireland, and officials said the assistance programs in both of those countries were on track to end as scheduled.
Greece is far behind schedule in meeting international conditions for a second bailout. The Greek government is negotiating with the IMF, the ECB and other European nations for more time to bring its deficits and economy into line.
The easing of Europe’s currency and financial crises does not mean the euro zone is out of the woods. Growth is expected to remain below par for years to come, and that likely means high unemployment and challenging conditions for households and businesses.