In this post, we take a closer look at how Portugal’s national debt-to-GDP ratio is calculated, why the country has found it hard to keep its debt down, and what types of government securities are sold.
The National Debt of Portugal
Portugal has a high national debt owing to government actions during the financial crisis of 2008.
The difficulties experienced by the country’s banking sector required state intervention. This intervention, in turn, led to a government debt crisis, which was sorted out with the help of the IMF and the European Union.
The government has endeavored to repay these debts. However, by the end of 2020, the Republic of Portugal had a debt-to-GDP ratio of 137.2%.
This is the IMF’s calculation of gross national debt. It focuses on “general government debt”, which is all the money owed by all levels of government in the country.
The OECD calculates the national debt to be “public debt”, which expresses all the money owed by the entire public sector. This figure equated to a debt-to-GDP ratio of 136.3% in 2020.
Why Did Portugal’s National Debt-to-GDP Ratio Escalate?
Given that Portugal got help to reorganize its finances from the IMF, you may wonder why the debt-to-GDP ratio continued to rise.
The reason for this lies on the other side of the deb-to-GDP ratio – GDP.
The government’s debts peaked in 2010 at Euro 149 billion and then continued to fall through to 2012 when it got to Euro 130 billion. The debt level stayed around the Euro 130 billion mark until 2015 when it rose back up to 149 billion Euros.
Before 2008, the Portuguese government had been running high budget deficits in order to pump money into the economy and promote GDP growth.
When the country needed a bailout, that government pump-priming stopped. Not only did the Portuguese economy suddenly experience a loss of economic stimulus, but the flow of cheap loans offered by the country’s banks also stopped dead. This resulted in a reversal in GDP growth.
GDP continued to decline because apart from the removal of easy credit and excessive government spending, the economy had to deal with the effects of bankruptcies.
The ripple effect of a recession takes time to work its way through the financial system and express its impact on the nation’s income.
In addition to the damaging effects of a sudden economic reversal, the higher borrowing taken on by the government did not provide income-generating benefits.
Rather, the cost of servicing the assistance loans that the government received required the treasury to extract even more money from the economy to pay higher interest and make capital repayments.
But just as Portugal was on the brink of recovery, posting a budget surplus for the first time in 45 years in 2019, the coronavirus pandemic hit the country hard.
The government projected public debt to reach 134.4% of GDP in 2020, up 16.7 percentage points from 2019, and slightly higher than 2014’s peak of 132.9%.
Who Manages Portugal’s National Debt?
The Ministério das Finanças, or ministry of finance, is responsible for overseeing Portugal’s national debt and is answerable to the nation’s parliament.
The task of managing the debt is implemented through a government agency, called Agência de Gestão da Tesouraria e da Dívida Pública, which translates to Portuguese Treasury and Debt Management Agency. The Agency uses the abbreviation “IGCP, E.P.E.” to describe itself.
The remit of the IGCP, E.P.E. doesn’t just extend to raising loans. The agency also has to think of ways of reducing the cost of Portugal’s national debt.
After the country hit a crisis in 2008/2009, international investors were unwilling to buy Portuguese government securities. Therefore, a large part of the assistance that the IMF gave to the country was in the form of a loan.
Since the country’s debt profile has stabilized, it is possible for the agency to raise funds for the government through issuing bonds. The interest that the IGCP, E.P.E offers on these bonds is lower than the interest on the IMF loan.
So, the agency has decided to pay off the IMF loan ahead of schedule in order to reduce debt servicing costs. By 2017, the country had paid off about 60% of that expensive IMF loan.
However, that repayment didn’t reduce the country’s overall debt level because debt raised through bonds replaced the debt to the IMF.
Wherever possible, the IGCP, E.P.E also engages in bond buybacks and replaces the debt that they represented with new commercial bonds at lower interest rates.
The higher rate bonds that are being retired are those held by various EU assistance funds and the ECB. So the IGCP, E.P.E is gradually replacing the debt held by supranational institutions with bonds held by investors.
How Does the Portuguese Government Raise Loans?
The IGCP, E.P.E. focuses its debt raising activities on the issuance of Treasury bills and bonds. It does not take out bank loans. Bills and bonds are sold off in auctions.
These primary issuances can only be bought by a circle of approved institutions called the “primary dealers”.
Another institution that wants to buy a large allocation of bills or bonds has to contact one of the primary dealers and get it to act as an agent at the next auction.
The primary dealers my tender for a portion of the instruments that are on offer at an auction. When a primary dealer does not sell its allocation directly to its clients, it places those bills and bonds up for sale on the secondary market.
The secondary market for public debt in Portugal is called the Mercado Especial de Dívida Pública (MEDIP). This market is based in Lisbon, but it is an electronic platform, so those who buy and sell on the market can be located anywhere in the world.
What Government Securities Does the Portuguese Government Sell?
The IGCP, E.P.E. sells three types of securities in order to raise funds for the Portuguese government. These are:
- Treasury bills
- OT bonds
- OTRV bonds
Treasury bills are commonly used by all governments for short-term financing. These devics never have a maturity of more than just short of one year (one year minus one day).
In Portugal, treasury bills are called Bilhetes do Tesouro (BTs). The BTs don’t pay any interest, but they are sold at discount and redeemed at full face value.
The auctions of BTs can only be attended by a subset of primary dealers that are specifically allowed to bid on treasury bills. This group is called the Treasury Bill Specialists (EBTs).
The standard Portuguese government bond is called an “OT”, which stands for Obrigações do Tesouro. The OT is a fixed-rate benchmark bond that has a maturity of one year or more, all the way up to 50 years.
OT bonds issued before 1994 pay interest in two six-monthly installments. Bonds issued after that date get one interest payment a year.
The Portuguese government also issues floating-rate bonds, which are called Obrigações do Tesouro de Rendimento Variável (OTRVs).
The interest rate stated on the OTRV bond certificate is the base rate plus a margin, so the actual interest payable each year may vary. Interest payments are made semi-annually.
Fun Facts About Portugal’s National Debt
- You could wrap $1 bills around the Earth 1,371 times with the debt amount.
- If you lay $1 bills on top of each other they would make a pile 38,460 km, or 23,898 miles high.
- That's equivalent to 0.10 trips to the Moon.
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Sources and Further Reading
- International Monetary Fund
- Learn more about the state of world government debt from our other country debt clock pages.
- See our global economic indicator guide to more than 45 countries.
- Get our full guide to trading commodities.