I have a new opinion piece (in Portuguese, with Eduardo Teixeira de Sousa) today in Expresso arguing that Portugal should assume a harder bargaining position vis-à-vis the troika of lenders (ECB, EU, and IMF) with which it negotiated a bailout package 18 months ago. You can find the original here (PDF) and the translated version below:

Portugal and the Default Option One and a Half Years after the Bailout

Eighteen months ago we wrote in these pages that a controlled default on Portuguese public debt could be “the option that best serves the Portuguese national interest and that of the remaining Euro countries” (Expresso, April 30, 2011 [here and, for a follow-up piece on how to renegotiate the debt, here, both in Portuguese; english versions of similar pieces we published in the Guardian here and here]). A renegotiation of interest rates and repayment terms, we wrote, was necessary to avoid another “lost decade,” creating space for economic growth, sending a strong signal to the markets about moral hazard, regulating credit demand and supply, and containing the political risk of a populist drift caused by a recessive austerity spiral, which would be required by the attempt to reimburse the current debt in the originally agreed terms. With multipliers already known at the time from the Greek experience and in the absence of external political support for a different course, there were no other political economy alternatives, so it was imperative to confront all parties with the real scenario as soon as possible.

At the time, Portugal was negotiating a memorandum of understanding with the troika. Apart from the radical left, national elites believed that austerity would have a positive impact on the country by imposing fiscal and budgetary discipline, introducing structural reforms that would lead to economic growth, and stabilizing the credit markets. The consensus around the idea that Portugal would have to be a “decent” country — a delightfully simplistic analogy with household economics that ignored the real financial situation of the country and the imperatives of political economy among sovereign states — and as such would have to pay its debts to the last penny still reigned. Our defense of a soft default was therefore considered irresponsible and immoral.

If one and a half years ago the effectiveness of austerity was uncertain, its catastrophic ineffectiveness is now crystal clear. Portugal is on a self-destructive course. In face of the current disaster, only the government seems to defend the course it has set, which amplifies risks and the suffering of the Portuguese people. João Carlos Espada, perhaps the most conservative among Portuguese commentators, reacted to the recently announced increase in income tax by writing that it is time to “stop and think” (Publico, October 8, 2012 [gated version here]). In short, during the past two months, a majority of moderate, responsible Portuguese citizens woke up to the consequences of our refusal to address an inevitable debt negotiation: the economic and social destruction of the country without any hope of reversing the course in a reasonable timeframe. And therein lies the problem.

A debt renegotiation is preferable to continued austerity not because it is painless. A strong Portuguese government that would confront the troika with the calamity caused by the bailout terms and force a debt renegotiation will face a hostile environment in the EU and in credit markets, producing a period of hardship for the Portuguese population and a significant risk of financial shock. But we would have a light at the end of the tunnel. Having agreed — or, if that proves impossible, unilaterally declared — longer reimbursement schedules and lower interest rates for the mountain of debt that asphyxiates the country, Portugal would then have a window of opportunity to implement structural adjustment, something that is much easier to accomplish in an environment of economic growth, social consensus, and predictability.

Some continue to argue that a debt renegotiation would eliminate the main incentive we have today to make structural reforms. But during the year and a half that has passed since the Portuguese government most committed to introducing a “change of lifestyle” in living memory took office, life changed only in the sense that the population is impoverished. No structural reforms have been achieved or even initiated.

Others argue that a debt renegotiation would destroy the only political achievement of the present government: the “good pupil” image it has created in the EU, which is supposedly much appreciated by our European partners and which, we are told, will bring great benefits if and when the crisis worsens. But what benefit has the country had so far stemming from the current government’s position of practically abdicating sovereignty? On the contrary, despite the IMF’s states skepticism about the direction of the country, the EU has been unwilling to make concessions to the Portuguese “good pupil.” Only those who possess a naive view of international political economy could expect anything different.

Portugal has two possible paths. It can continue to destroy itself in a maelstrom of austerity, wasting another decade, after which it will be inevitably worse than it is now and yet unable to repay its debts. Or it can renegotiate its debt, anticipating the inevitable and concentrating the pain of readjustment in a relatively short period, after which it could resume a growth path anchored by healthy, feasible rules for debt repayment.

This is the main dilemma facing the country. It is important that we we have a public debate on both options instead of continuing to pretend that the second does not exist.