Debt among Portuguese municipalities has grown steadily since the beginning of the European financial crisis. According to Eurostat, Portuguese local government debt has grown from 7 billion euros in 2007 to 10.1 billion euros in 2011. Parliamentary Affairs Minister Miguel Relva announced in March that the overall debt of municipalities and municipal companies is around 12 billion euros — equal to roughly 7 percent of Portugal's gross domestic product (GDP).
The ANMP admitted March 21 that the municipalities needed assistance from the central government to avoid a default. Then on April 4, the Portuguese government acknowledged the seriousness of the problem, admitting that some of Portugal's municipalities may need to restructure their debt.
Financial Oversight
The issues facing Portugal's municipalities are similar to those of Spain's autonomous regions, which have faced difficulties in repaying their debts because they have been shut out of capital markets. In Spain, regional governments have proved to be obstacles to Madrid's austerity plans.
But unlike Madrid, Lisbon has a copacetic relationship with its local governments. (It was relatively easy for Lisbon to reach an agreement with the ANMP.) Moreover, Portugal's local governments are less indebted than Spain's. Spanish regional debt accounts for 13 percent of the Spanish GDP.
However, the municipalities increasingly are becoming cause for concern in Lisbon. In 2011, the government had to bail out the island of Madeira to cover more than 1.5 billion euros of debt that the island had accumulated — and hidden from Lisbon — since 2008. An investigation by the central government later revealed that Madeira's debt exceeded 6 billion euros — more than 120 percent of the island's GDP. The bailout of Madeira was one of the main reasons Lisbon applied harsh austerity measures to reduce its budget deficit in 2012.
Since then, Lisbon has tried to improve its oversight of the finances of municipalities. According to the agreement between the central government and the ANMP, the 53 most indebted municipalities will have priority access to new credit lines, for which they will raise taxes and submit their local accounts to supervision from Lisbon. These municipalities must also submit a Plan of Financial Adjustment to the central government; the remaining municipalities will be subject to lighter controls.
Tempered Discontent
According to the terms of its 2011 bailout, Portugal is expected to reduce its budget deficit to 4.5 percent of GDP in 2012 and to 3 percent of GDP in 2013. As part of its agreement with the troika, Lisbon announced that money transfers from the central government to municipalities are set to decline 4.7 percent (roughly 2.28 billion euros) from 2012. Lisbon also announced it would enact administrative reforms, including the merger of several Portuguese municipalities, to reduce public spending.
However, Lisbon will likely fail to hit its budget deficit targets. In its spring economic forecast to the European Union, the European Commission warned that Portugal would fail to meet its deficit goals unless it took further measures. The warning accompanies Portugal's high debt, growing unemployment and lingering recession. According to the European Commission, the Portuguese economy will contract 3.3 percent this year and grow just 0.3 percent in 2013, down from a previous estimate of a contraction of 3 percent and growth of 1.1 percent.
Lisbon will be forced to continue assisting the municipalities. This assistance will take two forms. First, Lisbon will likely soften its limits on the money it transfers to the municipalities. Second, Lisbon is likely to approve more credit lines for the municipalities in the future.
Lisbon's attempts to restructure the political administration of the country already are provoking resistance among the population, and there will be more resistance when the municipalities apply higher taxes. However, the local administrations support Lisbon's proposals. In Portugal, regional nationalism is not as strong as it is in Spain, and the agreement with its municipalities was the result of a political negotiation. These two factors will temper public discontent. Protests can be expected, but they will not pose a serious threat to the stability of the central government.
Notably, Portugal's failure to meet its 2012 budget deficit goals would not preclude it from receiving international aid. Portugal has a good working relationship with the troika and has been meeting its creditors' austerity goals. Portugal's dire economic outlook may force the country to request a second bailout in 2013, but even if that happens, we do not expect Lisbon to face any significant problems in receiving a second aid package in 2013.
