Thumbnail Sketch of Portugal

This note is not intended to be comprehensive. The goal is simply to highlight the vulnerabilities of Portugal. Three key issues seem most important to me: debt, external position, productivity.

Portugal's sovereign debt is about 86% of GDP, while high, what is really important is the private sector debt. At almost 240% of GDP, it is among the highest in the world. A high percentage of its sovereign bonds are in foreign hands.

Portugal's current account deficit is above 10% of GDP this year. The OECD expects it to fall to 8% in 2011. In contrast, Ireland is expected to post a small surplus next year.

Productivity is around 2/3 of the average of the euro zone. Portugal shares with Greece a fundamentally uncompetitive economy. The accumulating debt hid the lack of of growth. As noted in an earlier post, Spanish banks are among the largest creditors of Portugal. That is a more important metric than the size of Portugal's GDP relative to the Europe's. China's recent expression of interest in Portuguese bonds was a nice gesture of a polite visitor. It is not the solution.