Joana and Nuno have just got married. Fortunately, they are already both employed. Nuno works as a consultant, and Joana is a nurse. As “wedding asks for a dwelling”, Joana and Nuno went to the Bank to ask for a mortgage loan.
Does Joana and Nuno know where the money comes from to pay for their home?
The level of saving in Portugal is extremely low. It has improved with the crisis, given the contraction in consumption, but still does not support the financing needs. That is, the level of savings of households, businesses and State should be sufficient to support the credit granted, but it is not.
In its genesis, the banking business is extraordinarily simple: the bank receives our savings, and pays us at a rate of (let’s say) 1.5%; at the same time, the bank “takes” these savings and loans them to Joana and Nuno, on which charges 3%. So, this means that our savings would be used to finance the acquisition of our young couple’s home, and the bank would make a profit on the “resale” of our savings’ money.
Let us now imagine that our savings were not sufficient for the bank to finance that acquisition, but that the financial institution is still interested in moving forward with the transaction. Since internally there are no resources available, since internal saving (in this simple example, represented by our savings) is not enough, then the bank will finance itself abroad by resorting to foreign banks, which in their turn have collected savings in their countries. In this context, the house of Joana and Nuno will have been financed (at least partially) by money coming from outside, creating foreign indebtedness.
Around these days the IMF estimates for public debt were published, and Portugal “does not look good in the picture”. On a positive feature, we can see a slight decrease in 2016 compared to 2015 (128.4% of GDP this year, against 129% in 2015), thus confirming the trend already observed in 2015 compared to 2014. However, among a group of 35 countries analysed, our country wins an “honourable” fourth place, with only Japan, Italy and Greece with a higher level of debt ahead.
From my point of view, more important than analysing debt alone, is analysing the same in relation to the exterior, that is, what our degree of external dependence is. This is where our real problem resides, and that has largely dictated the need to have had three ransoms in the last 40 years.
There is an indicator that helps us understand this phenomenon. This indicator is called “IIP – International Investment Position”, and provides us the “balance” between what we borrowed abroad and what other countries lend us. According to the latest data of Banco de Portugal, published in September, the Portuguese IIP at the end of the second quarter of 2016 stood at -105.7% of GDP. This means that, for each 100 euros of what we produce, we owe in net terms (already discounting what we have to receive from abroad) 105,70 euros.
Let us now look at it in comparative terms. At the end of 2015, Portugal presented an IIP of -109.5% of the GDP, while the euro area average stood at -9.2% of the GDP. For example, Italy, which appears ahead of us in the debt figures mentioned above, in 2015 presents a IIP of -24.2% of the GDP. That is, for every 100 euros of wealth produced in Italy, only 24 euros are owed abroad.
Joana and Nuno are mainly worried about paying the installment at the end of the month. But it is important that both are aware that this money leaves the country, to pay who indirectly financed, through a Portuguese bank, the purchase of their home. It is important, therefore, to be aware of the relevance of this issue to our future as a country, in particular to our sustainability and economic independence. Not that the young couple can do something about it right away. But if they are well-informed, they will be better placed to demand those policy makers not to take (any more) decisions that increase our external debt, jeopardizing the country’s future. It is a citizenship duty of Joana, of Nuno, and of all of us, don’t you agree?
Till next post!
UWU Solutions CEO / Consultant / Lecturer