It had only been one year and a half since the end of the previous recession. The world was slowly coming out of the financial crisis that was started in the USA and spread through the world, with the financial sector at its centre.

Investors were wary and more risk averse following the losses recorded in the banking sector. Public debt had reached a high level because of the stimulus programmes in response to the previous crisis and the financial sector bailouts. Distrust spread to public debt markets and gave rise to fears that many countries could not honour their commitments. The interest rates charged on loans to countries began rising to compensate for this increased perception of risk.

The most severely affected countries were in the periphery of the Eurozone. First came Greece, with the discovery that there had been some mis-reporting State accounts. Then Ireland, dealing with a housing bubble that the country’s banks were exposed to. Portugal was the next country to be under inspection by the markets. Not only did it have high levels of public and private debt, it was also coming out of a decade of poor economic growth, which called into question its ability to create enough income to meet these commitments. In an economy with low levels of savings, the Portuguese banking system had long been raising funds abroad to lend to the country.

External dependence was thus very high.

Interest rates became untenable.
10-year yield for government bonds (%)

The government led by José Sócrates introduced successive measures to try to restore the confidence of investors in Portuguese debt. The goal was to reduce the imbalance in public accounts and halt the rising debt in order to ensure better funding conditions.

The first range of measure, on spending cuts, was announced in March 2010. Others followed, with further spending cuts or increased taxes. These were all restrictive measures which, unsurprisingly, led to a recession, beginning in the third quarter of 2010.

At the European level, Greece had asked the European Commission, the European Central Bank and the International Monetary Fund for aid in April. The same was in store for Ireland and came in November of that year.

The funding packages from the European Commission, the European Central Bank and the International Monetary Fund, a group that was also known as the troika, were accompanied by measures aimed at correcting the economic and financial imbalances in order to re-establish their ability to finance themselves on the market.

The government's successive attempts to avoid this last resort solution failed. Prime Minister José Sócrates resigned when the last austerity package was rejected in parliament and the bailout request became inevitable. It was made in April 2011 and involved a financial envelope of EUR 78 billion. The plan would be applied by the government led by Passos Coelho, which had won the election held in May.

Recession in Europe too

Soon afterwards, most countries in Europe went into a recession as well, making everything even more difficult. The combined effect of the external climate and the harsh measures that came with the financial bailout, all pushing for a recession in the short term, further worsened the crisis. Public investment and state spending were cut and private consumption fell, leading to an increase in unemployment and a drop in income. Without credit or confidence, investment by companies also declined. Only exports remained somewhat dynamic, but this proved insufficient to cushion the devastating effects of austerity.

GDP per capita

This was the deepest recession since 1980: a fall of 6.9%. The decline continued for 10 quarters. This rare amplitude clearly reflects the severity of this crisis. The peak for this business cycle was reached in the third quarter of 2010. After that, the fall continued until the first quarter of the following year, at which time it reached its trough.

Euros (€), chain-weighted, base year 2011

Unemployment rate

Unemployment maintained its upward trajectory, continuing the trend carried over from the previous decade. The inflection came precisely after the end of the recession.

Economic Sentiment Indicator

Economic sentiment had been recovering since early 2009, but later, between 2010 and 2012, it plunged around 20%.

Indicator, 100=August 2010

The effects of this recession were devastating in both economic and social terms. Unemployment, which had been constantly increasing since the previous recession, exceeded 17% at one point. Household consumption fell by more than 10%, reflecting the drop in employment and income.

Industrial production also decreased, despite have been cushioned by increased exports. Foreign sales of products and services showed a positive dynamic, with many companies finding an alternative to the recessive domestic market in exports.

The country only recovered its ability to finance itself on the markets after the end of the recession, when interest rates fell and some credibility was restored. The public deficit fell from a high of 11.4% of the GDP in 2010 to 4.4% in 2015, but public debt remained above 120% of the GDP for some years more.

The exit from the troika bailout was on schedule, in mid-2014. However, the effects of the crisis continued for some time and certain extraordinary measures that had been taken remained in force until at least 2020, such as the increase in VAT on energy.

This was the most severe and most traumatic crisis experienced by democratic Portugal.