The Bail Out, The Knight In Shining Armour, The Housing Market and a Damsel In Distress

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David Rowat, Operations Director at PortugalProperty.com,  explains why he is lowering the drawbridge and inviting ‘Sir’ José Manuel Barroso (former Portuguese Prime Minister and now President of the European Commission) to leave the Round Table of Brussels and bring more riches into his fallen country.


Introduction

Portugal and Spain are hitting the headlines for all the wrong reasons. Disaster, humiliation and bankruptcy – are typical words being banded around and causing concern in a housing market that, like most countries, has been severely wounded over the last few years. 
 
The latest coverage following the resignation of José Sócrates leads most advisors to suggest a bail out will now be unavoidable and the question this asks is how will it effect the Portuguese economy and, for foreigners, the housing market in Portugal?
 

What is a bailout?

A bail out in this context is a loan from the EU to stabilise the economy, as without it the Government could not continue to borrow funds at sustainable interest rates. Effectively the Portuguese economy cannot support itself and despite bringing in austerity measures it’s too late to save it as a ‘going concern’. 
 

How did it happen?

Unlike Ireland, Portugal did not have the credit crunch crisis that led to the Government pumping millions into the banks. Equally it never had the boom and bust of a property bubble that led to this eventuality. So what did go wrong? In essence, Portugal has been poorly managed, lacked a competitive edge and now it is lost in the wilderness just like it’s cork forests overlooked for the new versatile in-demand plastic corks. It has lost its way.
 

Why not continue without a bailout?

If it continues to borrow at rates which it can’t afford then eventually the money would stop. At street level, this would lead to a run on Portuguese banks resulting in mass withdrawals by customers worried their bank will go bust. If this were to occur the EU and IMF would need to provide emergency funds immediately rather than in a controlled manner a bail out would provide. 
Banks (because of historically lower bonds issued by the Government) will see their returns diminish and this will make them inclined to lend less. 
 

What does the bailout mean for Portuguese Citizens? 

Analysts say a bailout will have beneficial effects as austerity measures the Government would have been forced to put in place will be less severe under EU jurisdiction. Banks will continue to lend.
 

Who would pay for a bailout?

This is perhaps the crux of the matter. The disaster that is being reported is a disaster for whom? The local newspapers talk of humiliation for the Government but isn’t it somewhat like a student who has exceeded his overdraft facility and is faced with two choices which allow him to continue. Either pay extortionate rates or seek money from his unselfish parents. Humiliating the latter may be but also quite sensible. In this case, Portugal may well be left red-faced but does it make any difference? The EU knights in shining armour will be a much better option than borrowing money at any price.
 
The EU will pay for another bailout as they have done with Ireland and Greece. Countries and their taxpayers pay according to their size: Germany the most and Malta the least. 
The Daily Mail reported (25/3/11) that it expects each family in Britain would have to foot the bill to the tune of £300 to pay the £6 billion likely to be committed by the UK.
 

What has been the reaction of Portuguese people towards the bailout? 

The people were not prepared to accept further austerity measures proposed by the minority government and all the other political parties opposed. This led to the Prime Minister resigning. 
This action has effectively laid the way for the bailout as being the only viable option.
 
Interestingly bank deposits reached an all time high in January 2011, since records began in 1989 despite the austerity measures in place. It seems Portuguese families upped their efforts in putting away savings as reported in The Portugal News 26/3/11
 

What facts can we rely on?

Fact 1 - Life continues for the citizens at an easier level that would have been expected.
Fact 2 - This rescue package will not be unlike the 8.8m per day the EU gave Portugal to develop over the last 7 years - the difference this time is it will be to stabilise the economy rather than invest. 
Fact 3 - It is paid for by the EU - and its taxpayers.
Fact 4 - The euro strength has not suffered due to the markets having already considered this a foregone conclusion (The Independent 26/3/11)
Fact 5 - The EU will insist on certain measures and have an impact on the governing of Portugal. This is welcome and necessary to place the country on a sounder footing where it can make inroads into future competitiveness.
 

What conclusions can we draw from this? 

The local market will be unaffected; the overseas market will be unaffected. The prices will be unaffected.
Those property investors looking for a bargain will continue to look. The distressed sales of recent times are drying up. Construction in the Algarve is down 85% since the high demand years of 2007-2008 and so supply is back to matching demand. There is not a glut of properties waiting to be sold.
 
Bargains still originate primarily from individual circumstances rather than a declining economy – bargains from divorce, inheritance or personal hardship. Balancing this is the irrepressible desire for foreigners to still secure a second home here – to plan for retirement and improve the quality of their lives.
 

Portugal – The damsel in distress, her future and the heroes

Taking everything into account Portugal can claim that membership of the EU has been the most important event in its recent history. Since its membership started in 1986 it has received billions of euros to improve its infrastructure, billions to improve its economy and billions to make it competitive. It failed somewhat.
And yet all is well. The damsel, who has miles of golden sandy beaches, is blessed with a warm climate and who loves and adores her quality of life can breathe easily. For soon, those kindly knights of Europe will return to replenish the chest and take care of her once again.
 
Little does she realise or even need to appreciate that the true knights are the hard working people living across the other side of Europe whose Governments signed up to ‘bailout’ treaty. For they, who live in lands of grey and rain are the real heroes and ironically it’s no wonder they still have a burning desire to be here. They are, after all, or soon will be, paying for it. 
 
For further information on Property for sale in Portugal, or general questions on the Portugal property market please contact the team via email at: info@portugalproperty.com 
Or call free on +44 (0) 800 014 8201

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