Dissertation

A study on Portuguese
economic growth and debt
From European integration to Euro zone
José Seabra
MBA 2012

ii
AKNOWLEDGEMENTS
Writing a dissertation is a long and sometimes painful process. It would not be possible to
complete without the help and support of a handful of people.
First of all a big thank you to my wife. Your support and opinions were very important throughout
this process. Without you, your love and understanding, none of this would be possible.
Would also like to thank my mum, dad and brother for being there every time I needed.
Thanks to my friends that in one way or another helped me to complete this project.
Also thanks to my company for the support during my studies.
Finally, I would like to thank the Portuguese Treasury and National Institute of Statistics for the
support in getting the data I needed for this project.
Muito Obrigado.

iii
ABSTRACT
This dissertation focuses on the study of the evolution of the economic growth and government
debt as a percentage of the GDP in Portugal from 1986 until 2010. The aim is to assess
whether the adhesion to the European and Monetary Union (EMU) affected both indicators and
if those variables are interrelated. In the period from the adhesion to the European Economic
Community in 1986 until the signature of the Maastrich Treaty in 1992, the GDP growth was
5.46 per cent a year, on average, and the debt ratio was between 50 and 56 per cent.
Following the signature of the Treaty until the official creation of the Euro, the average yearly
economic growth has decreased to 2.50 per cent and the debt ratio achieved a maximum of 59
per cent. During the Euro area period, the research has shown that the economic growth has
decreased further, reaching a rate of only 1.2 per cent and overtaking the 60 per cent of GDP
debt ratio. Furthermore, it has been demonstrated that there is a negative correlation between
debt ratio and economic growth. The Pearson’s correlation was -0.41 (classified as a strong
relationship) and the significance test was 2.09 per cent, meaning that there is very little
probability of the results being attributed to chance.

iv
TABLE OF CONTENTS
AKNOWLEDGEMENTS............................................................................................................................ ii
ABSTRACT ................................................................................................................................................ iii
TABLE OF CONTENTS........................................................................................................................... iv
1. INTRODUCTION................................................................................................................................1
2. INDUSTRY BACKGROUND ............................................................................................................3
3. AIM AND OBJECTIVES....................................................................................................................5
4. LITERATURE REVIEW.....................................................................................................................7
4.1 Costs and benefits of a having a single currency...........................................................................7
4.2 European integration: from the Maastricht Treaty to the Stability and Growth Pact........8
4.3 Economic Growth.....................................................................................................................10
4.4 Debt Structure...........................................................................................................................12
4.4.1 Debt issuance in a monetary union ...............................................................................13
4.5 Monetary Policy ........................................................................................................................16
4.6 Relation between government debt and economic growth................................................21
5. RESEARCH METHODOLOGY......................................................................................................23
5.1 Research Method.....................................................................................................................23
5.2 Economic Growth.....................................................................................................................24
5.2.1 1986 – 1991: From EU adhesion to Maastricht Treaty...............................................25
5.2.2 1992 – 1999: From Maastricht Treaty to Euro.............................................................26
5.2.3 1999 – 2010: Euro era.....................................................................................................28
5.3 Government Debt Issuance....................................................................................................30
5.4 Debt ratio and public deficit ....................................................................................................36
5.5 Government Debt and Economic Growth in Portugal.........................................................39
6. DISCUSSION OF FINDINGS.........................................................................................................43
7. CONCLUSION..................................................................................................................................45
REFERENCES .........................................................................................................................................47
APPENDIX 1 - Government Debt Issues - Funded debt ...................................................................52
APPENDIX 2 – Exchange rate...............................................................................................................53
APPENDIX 3 – Co variation calculation ...............................................................................................54

1
1. INTRODUCTION
Economic growth, public debt, the Euro. Over the past few years, these concepts have been in
the centre of attention of all economic agents and sectors, from the Government, to banks, the
media and consumers. It is therefore important to understand the differences between the
performance of the Euro area countries before and after the creation of the European Monetary
Union (EMU). In order to assess the performance of Europe under the single currency, it is
important to focus on individual countries. As there are many discrepancies between different
European countries, mainly South (including countries such as Portugal, Spain, Italy and
Greece) and North (including Germany, France, and Finland, for example) Europe it is important
not to focus on the Euro area as a whole as the results could be damaged by the different
performances of different countries. Therefore, being in the centre of the news and economic
discussion in European institutions and the media, the focus of this research will be in Portugal.
The aim will be to compare the performance of the country in terms of economic growth and
public debt in three different periods:
1. From adhesion to the European Union (at the time still called European Economic
Community) in 1986 until the Maastricht Treaty (that created the bases and rules for the
creation of the Euro)
2. From the Maastricht Treaty until the official creation of the Euro in 1999
3. Euro area period.
The first part of this research will intend to give a background on the industry providing an
overview of the bases of the European Union and a brief historical review. The aim is to provide
a background on the main events in Europe that led to the creation of the EMU.
Part two and three of the dissertation are intended to explain the objectives proposed and the
answers that the research is aiming to provide. This will be the basis to understand what it is
proposed and place the research into context.
The forth part will focus on research already done on the subject. It will first focus on the costs
and benefits of entering into a monetary union and will give an overview of the Maastricht Treaty
and the Stability and Growth Pact that are important to understand the rules and controls that
are in place in the Euro area. The intention is also to understand the reason behind Portugal

2
moving towards the single currency and the conditions in which it occurred. Following this
discussion, an overview of the monetary policy available for a closed and a monetary union will
be provided. The focal point in the next section will be on economic growth explaining the
concepts and provide an overview of the most important work done in the area by different
authors. Some contra factual analysis on the behaviour of the economic growth if Portugal did
not adhered to the EMU will also be discussed. Following this discussion, the analysis will
centre on the debt structure of Portugal. With the creation of the Euro, debt management
practices and characteristics have changed and different authors have already discussed it.
Nevertheless, the literature available is still scarce. Also, issuing debt with a single currency has
different characteristics that will be provided in this section. Finally, there will be a discussion on
the work done by several authors throughout the years on the relation between economic
growth and government debt which is very important in order to study the performance of
Portugal on the periods under studies.
Research methodology and analysis of the data collected will be the focus of the fifth part of the
research. The focus will be on the economic growth in the different periods under analysis. The
evolution of the Portuguese economic growth from the adhesion to the EEC in 1986 until 2010
will be presented and analysed in three subsections: before the creation of the single currency,
during the preparation to the Euro zone and during the years following the creation of the UEM.
Furthermore, there will be an analysis of the debt issuance in Portugal from the moment the
country entered the Euro zone with the main differences being discussed. In addition, the
Portuguese deficit and government debt will be analysed. Finally, this part will conclude with an
analysis on the relationship between government debt and economic growth in the particular
case of Portugal. The objective will be to establish if there is a direct relationship between these
variables. The method used will be to calculate the Pearson’s correlation between the debt ratio
and economic growth, i.e., establish whether a change in one of the variable affects the
behaviour of the other.
This research will finalise with the discussion of findings made on the fifth part supported by the
research that has already been discussed in part four. Also, some gaps in the research
available on these subjects will be identified and some possible future research will be
proposed.

3
2. INDUSTRY BACKGROUND
The creation of the European Economic Community with the signature of the Treaty of Rome in
25 of March 1957 was one of the most important developments of the past century in terms of
international integration. The treaty was originally signed by 6 countries: Belgium, France, Italy,
Luxembourg, The Netherlands and West Germany. The treaty proposed the reduction of
custom duties and there was also the intension to create a common market of goods, workers,
services and capital within the European Economic Community countries. This was the first step
taken towards a wider European integration
Throughout the years, many countries adhered to the European Economic Community such as
Denmark, United Kingdom and Ireland in 1953, Greece in 1981 and Portugal and Spain in 1986.
Later, in 1995, other countries joined the European Union: Austria, Finland and Sweden. This
period was also important as the member states were preparing to join the Euro.
In 1992, the signature of the Maastricht Treaty was an important development on European
integration, creating a European Monetary Union and the conditions for the single currency. It
also set clear rules for foreign and security policy and closer cooperation in terms of justice and
home affairs. The designation of the European Economic Community was also changed to
European Union. Therefore, the Maastricht Treaty is also known as Treaty on European Union.
One year later, the single market rules are established: free movement of goods, services,
people and money is now a reality. Furthermore, in 1995, the Schengen Agreement takes effect
in seven different European countries – Belgium, France, Germany, Luxembourg, the
Netherlands, Portugal and Spain – which means that travellers from any nationality can travel
between these countries without having to go through a passport control check at the frontiers.
In 1997, the Treaty of Amsterdam was signed. Building on the achievements made on the
Maastricht Treaty, it created the conditions for Europe to have a stronger voice in the world and
concentrated more resources on employment and rights of European citizens.
The greatest developments since the creation of the European Union was achieved in 1999.,
when the Euro was officially introduced. This development had major consequences for the
member states. The creation of the European Central Bank that will set the euro zone interest
rate and will have the mission to keep inflation below but close to 2 per cent meant that local

4
central banks lost most of their power1
. Also, governments lost the ability to set their own
monetary policy as it is now set by the ECB taking into account the needs of all member states.
Following the creation of the Euro, Europe opened its frontiers to Eastern Europe and several
other countries joined the EU. These countries include Cyprus, Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Malta, Slovakia, Slovenia and Poland. Later, in 2007, Bulgaria and
Romania also joined. At this point, Europe has now 27 different member states.
The financial crisis of 2007 and the sovereign crisis that arise afterwards have put Europe in the
spotlight. Greece, Ireland, Portugal and more recently Spain, have to request for financial help
so that they could avoid defaulting on their debt. The International Monetary Fund (IMF),
European Central Bank (ECB) and European Commission came with the bailout needed to
support those countries. Since these events, many question came up regarding the failure (or
not) of the euro and the EMU project mainly focusing on each member state debt and economic
growth.
The European Union is, therefore, in the centre of the economic thinking and the main
developments that it created are important to analyse. Therefore, it is imperative to analyse the
differences between the debt structure and economic growth on the euro member states before
and after their adhesion to the single currency. The country that the research will focus on will
be Portugal as it is one of the countries currently facing a bailout from the IMF, ECB and
European Commission and is currently facing huge challenges on its debt structure and
economic growth. Thus, it is important to analyse the differences and challenges that the
Portuguese economy encountered from the moment it joined the European Union until the Euro
zone era.
1
For more on the ECB mission and its role, please see www.ecb.int.

5
3. AIM AND OBJECTIVES
Adhering to the European Economic Community was one of the main international
achievements of Portugal during the last century. Portugal have been through a long
dictatorship and being able to open its frontiers and join the European project was seen as very
important for the future development of the country. Therefore, the study of what was achieved
during this period is very important to understand the success of European integration. However
this was not the only important event for Portugal during the last century in terms of economic
integration. In fact, the creation of the Economic Monetary Union has marked the change of the
economic paradigm in Europe. The introduction of the Euro was without a doubt one of the most
important events of the past 30 years. To be part of the founding group of the EMU, Portugal
had to go through some structural changes in order to comply with the guidelines stated in the
Maastricht Treaty (1992). Being able to comply with the Maastricht rules was a great
achievement for Portugal and the country was able to join the single currency as a founding
member from 1999.
The three different periods just described will be the basis of this dissertation. The aim will be to
analyse and compare the differences in terms of economic growth and public debt in Portugal in
the years before the implantation of the Euro until 2010. For this purpose it is important to take a
look into the guidelines of the Maastricht Treaty that set the rules that member states had to
comply in order to be able to join the Euro. This period was marked by structural reforms in
Portugal in order to be accepted as a founding member of the European Monetary Union. The
implications of the measures adopted in the country in order to adhere to the euro will be
analysed throughout the research. The changes in terms of economic growth, government debt
and public deficit will be discussed and there will also be a comparison between these numbers
and the economic growth in Portugal following the implementation of the Euro. The question
that this dissertation will attempt to answer is whether Portugal had a better or worst
performance in the years that follow the implementation of the Euro.
Another important aspect that needs to be looked at is the public debt of the Portugal. One of
the most important instruments that a country uses to raise money is issuing bonds. Since the
adhesion to the EEC Portugal has used this instrument to be able to raise money and invest in
structural infrastructures in order to develop the country. However, there are many limitations to
raise debt as the markets are not integrated and investors perceive Portugal as a risky country

6
to invest in. Following the adhesion to the Euro, raising debt became easier and Portugal took
the opportunity to issue more bonds during this period and also reduce the interest payments.
Throughout this dissertation will take a look into the debt structure of the country before the
implementation of the Euro and compare with the period following the adhesion to the EEC.
Also, the aim will be to analyse and investigate the main differences between both periods and
the new characteristics of debt issuance.
The final objective of this dissertation is to study the relation between economic growth and
government debt as a percentage of the GDP. Both these indicators will be the focus throughout
the dissertation and the main conclusions will be achieved by studying the behaviour of both
these variables. Therefore, it is important to assess whether there is any direct relation between
them.
To summarise, this research will analyse the GDP growth in Portugal since 1986, the year of the
adhesion to the European Economic Community until 1998. The intention is to assess the
behaviour of this variable in the country before the adhesion of the euro. The debt structure of
the country between those years will also be analysed. Following this period, Portugal adhered
to the Euro and the impact of the single currency on those variables will be analysed. Finally,
the conclusion will focus on whether adhering to the European Monetary Union was positive for
Portugal when comparing to the economical and fiscal situation of the country following the
adhesion to the European Union with the economic development until the single currency was
created.

7
4. LITERATURE REVIEW
4.1 Costs and benefits of a having a single currency
European integration and the euro have been on the top of the news on the past few years. The
creation of the European Monetary Union and the euro were one of the main developments of
the 1990s. With European countries more and more integrated and regularly selling goods and
services across member states, much time was spent trading one currency to another.
Therefore, to improve economic relations between European countries, 11 European countries2
decided to form the European Monetary Union which will have a single currency: the euro.
Eudey (1998) argues that moving to a single currency has many benefits for the member states.
Firstly, it reduces costs of exchange. When importing a good or service from another country,
an importer have to exchange domestic to foreign currency in a bank. A service fee applied by
the bank will increase the costs of the transaction. This will be eliminated with the use of a
single currency.
The second benefit is to reduce exchange rate uncertainty. The uncertainty of the value of the
exchange rate in the future is a risk for an importer. In fact, if a company imports a good today
and the payment is only due in a month, it doesn´t know which amount will have to pay in the
end of the period. Using the euro also eliminates this uncertainty.
Thirdly, having a single currency prevents competitive devaluations. Many countries use
exchange rates to boost their exports. By devaluating its currency, a country can lower the price
of its goods and services comparing to other countries. This way, the export sector will be
benefited from this currency move and will affect foreign countries. With the creation of the euro,
a country will have to improve its competitiveness in order to increase their export and will not
be able to devaluate its currency.
Lastly, having a single currency will prevent speculative attacks. Before the creation of the euro,
European countries were vulnerable to speculative moves. If speculators believe that the value
2
The European Monetary Union founding members were Austria, Belgium, Finland, France, Germany, Ireland,
Italy, Luxembourg, the Netherlands, Portugal and Spain. Greece joined afterwards in 2001, Slovenia in 2007,
Cyprus and Malta in 2008, Slovakia in 2009 and Estonia in 2011.

8
of a currency will decrease they will sell the currency and may force the countries´ institutions to
devaluate even if it wasn´t its intention.
Despite all this benefits the creation of a single currency doesn´t come without a cost. The
biggest cost is that a country ceases the ability to set its own monetary policy (Grauwe, 2007).
This means that in a monetary union there will be a single supranational Central Bank and
national Central Banks will have no real power. The costs associated with giving up the
possibility of independent monetary policy vary from country to country being higher for small
countries such as Portugal. Currently, national central banks may respond to a recession by
increasing the amount of money in circulation which will lower its interest rate and stimulation
investment and economic growth. In a Monetary Union, if a single country is in recession it is
unlikely that a European Central Bank will use an expansionary monetary policy, since it would
cause inflation to all other member states (Eudey, 1998).
There are both costs and benefits associated with a European Monetary Union. In the case of
Portugal, many economical benefits as well as a higher monetary and financial stability which
contributed to promote economic growth. Furthermore, there was an higher integration of the
goods and services markets (Aguiar-Conraria, Alexandre, & Pinho, 2010). Therefore, the
benefits for Portugal of integrating the European Monetary Union were believed to be higher
than the cost of losing the ability to set its own monetary policy.
4.2 European integration: from the Maastricht Treaty to the Stability and Growth
Pact
From the middle of the 80s, European Union lived a moment of dynamism and prosperity which
will be reflected in the negotiation and signature of the Maastricht Treaty on 7 February 1992,
which established new frontiers for European integration. At this stage Portugal was in the first
years of European integration and was preparing itself for the implementation of the common
market (Cunha, 2012). The first main decision of the treaty was the change of the denomination
from Economic European Community to European Union
The purpose of the treaty was to prepare for the European Monetary Union and introduce the
first elements of a political union. The so-called Treaty on European Union created the
conditions for the introduction of a single currency and the free movement of goods, services

9
and people. It also created what is referred as the pillar structure of the European Union. The
treaty established three pillars of the European Union, The European Community pillar, the
Common Foreign and Security Policy and the Justice and Home Affairs pillar. Supranational
institutions were also created – European Commission, European Parliament and European
Court of Justice. These institutions have more influence over the first pillar of the European
Union. The treaty has been amended by the treaties of Amsterdam, Nice and Lisbon.
The Stability and Growth Pact was agreed in 1997 stating that the rules ser for all countries in
the Maastricht Treaty should apply once the Euro was launched. This meant that the following
criteria had to be achieved by all European countries in order to become founding a member of
the Monetary Union.
1. Inflation rates shouldn´t be more than 1.5pp of the average of the three EU member
states with lower inflation.
2. Government Debt shouldn´t be more than 60% of GDP and the ratio of the annual
government deficit to GDP must not exceed (but should be close) to 3%
3. EU member states applying for the Monetary Union should be members of the
exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for a
minimum of 2 years and should not devaluate its currency during that period.
4. The nominal interest-rate of a member state shouldn´t be 2pp higher than in the three
lowest inflation countries.
The pact consists in a set of fiscal monitoring of all European members with a set of warnings
and sanctions against offenders (Ludger Schuknecht, 2011).
The creation of the Stability and Growth Pact shows that the European Union is committed to
the Euro. The successive revisions on the Pact are positive as they make the rules more flexible
allowing countries to break the deficit limit to boost economic growth. The Stability and Growth
Pact also discourages governments to break the debt and deficit rules to win elections and
instead encourage them to think about long term growth and stability.
There are also some criticism on the Stability and Growth Pact. As the targets have to be met
every year the rules do not take into account of the flexibility that governments need in order to
balance their budgets across periods of fluctuations of supply and demand in the economy
(Exenberger, 2004).

10
4.3 Economic Growth
European integration has been well documented in academic literature. Authors such as Jorge
de Braga Macedo (1999) argued that the nature of the EU membership has been changing
throughout the years. The commitment of every member country to the union has also been
going through different phases with the creation of the euro in January 1999 as one of the most
important developments.
An important discussion to be made to assess the success of European integration is whether
Portugal converged in terms of economic development with other member states since the
adhesion to the EEC. The first concept that should to be taken into account is economic growth.
Economic growth is the macroeconomic area that studies the Gross Domestic Product growth
over periods of a decade or more. It is usually understood by the growth rate of real GDP per
person and achieving a sustainable growth is often an important distinction of economic
success (Gordon, 2003). Economic growth can be measured by an increase in a country’s
Gross Domestic Product (GDP) (Samuelson & Nordhaus, 2009).
In 1986, the year Portugal join the EU, the average per capita income was 56 per cent of the
union average rising to 74 per cent in 2005. (Royo, 2005) There are also authors arguing that
there is only little evidence of per capita GDP convergence with only Ireland being the true
example (Roubini, Parisi-Capone, & Menegatti, 2007) or no evidence at all of acceleration in the
speed of convergence is found in the years after 1986 (Freitas, 2005). Other authors, however,
argue that EMU integration enabled Portugal to converge towards the richest countries in the
Euro zone. Constâncio (2004) argues theat the European monetary integration of Portugal can
be seen as a story of success either if we analyse since 1986 or 1992 (when Portugal joined the
Exchange Rate Mechanism (ERM) and the year of the signature of the Maastricht Treaty that
created the basis for the single currency).
Following the adhesion to the European Union in 1986, Portugal experienced a period of high
GDP growth rates and convergence towards the richest countries in the EU (Aguiar-Conraria,
Alexandre, & Pinho, 2010) However, low growth rates and economic divergence were
experienced in the period that followed the creation of the Euro. This view is also defended by
other authors. A study by Lopes (2008) pointed out the relevance of the exchange rate as an
instrument of monetary policy. Aguiar-Conrario et al. (2010) argue that from the moment

11
Portugal entered the Euro in January 1999, a mechanism to correct possible external
imbalances was lost as the exchange rate was irrevocably fixed.
Some significant economical benefits were also expected by participating on the creation of the
Economic and Monetary Union: on one hand, a higher financial and monetary stability could
contribute to promote economic growth in Portugal; on the other hand, a deepest integration on
goods and services market as well as capital and working market could generate efficiency
gains – for a deepest analysis on the costs and benefits of EMU integration, see section 4.1 and
the work by the Portuguese Ministry of Finance (1992).
With the creation of the EMU, many authors suggest that there was a shift in European
coordination. A crucial question for the success of the single currency is whether the
combination of policies set by a supranational central bank and national governments would
conduct to both price stability and economic growth; also, the essential problem is to ensure that
national fiscal policy and supranational monetary policy can be compatible (Begg, Hodson, &
Maher, 2003). Therefore, decisions made by the European Union affected each member state
more than ever and, therefore, their economic growth.
There are arguments that suggest that the fiscal discipline and coordination needed to be
allowed to enter the EMU will disappear in some countries (Fatás & Mihov, 2003). This is an
important development as it affects both the debt structure and the GDP growth of a country
(Gordon, 2003).
The decision to participate in the EMU represented a significant change in terms of economic
regime for the countries involved. At the time of the creation of the EMU an optimal monetary
union was not formed, the decision to adhere to the euro by some member states was based in
a cost and benefits analysis. Some countries such as Sweden, UK and Denmark chose not to
take part in the Euro3
. Therefore, some authors have studied what might have happened in
terms of economic convergence if Portugal had not joined the UEM.
Barbosa et al. (1998) considered in their evaluation that Portugal would keep a policy focusing
on price stability and budgetary discipline despite being out of the Euro zone. They have
concluded that if Portugal hadn´t joined the Euro, the GDP per capita level would be
approximately between 0.8 and 7 per cent lower, in ten years.
3
The UK and Sweden have chosen to increase the independence of their Central Banks and to define an inflation
objective. Denmark, on the other hand, fixed a parity with the Euro renouncing the use of an independent
monetary policy.

12
Martins (2009) has presented an analysis to evaluate the adequacy of the monetary policy to
the conditions of the Portuguese economy, assuming that the ECB has the macroeconomic
stabilization of the Portuguese economy as the main objective. Using data for the period
between 1999 and 2007 he concluded that under that scenario, the interest rate would be
higher and the countries’ GDP significantly lower.
A counterfactual research conducted by Pinho (2010) gets to the opposite conclusion. By
modelling the economy in the context of a vector auto regression approach, the study concludes
that entering the EMU resulted in lower economic growth than if Portugal had not joined.
Another study based on Pinho’s researched concluded that the performance of the Portuguese
economy in terms of economic growth, if Portugal didn´t adhere to the Euro, would be more
favourable in years of positive growth but also more negative in years of negative growth, such
as 2003 and 2009 (Aguiar-Conraria, Alexandre, & Pinho, 2010). It seems that the Euro worked
as a shield in periods of negative economic growth which might have supported the Portuguese
economy in the financial crisis.
4.4 Debt Structure
An important subject when studying European integration and the Euro area is the changes on
the debt structure of the different countries. Government debt and deficit are the primary focus
of fiscal surveillance in the euro area (ECB, 2007) and, therefore, the most important variables
to consider when studying the debt structure of an Euro zone country. As a result it is important
to define government debt and deficit.
Government debt can be defined in several ways depending on different variables, such as
economic sector of reference or the liabilities that are being considered. Overall, government
debt consists on the liabilities owed by a government (Lojsch, Rodríguez-Vives, & Slavik, 2011).
Therefore, it is the total debt that a country owes.
In the framework of the Maastricht Treaty and the Stability Growth Pact, the concept of
government debt is total gross debt at nominal value outstanding at the end of the year and
consolidated between and within the sub-sectors of general government (Portugal, 2012). For
the purpose of this dissertation, government debt is understood as the consolidated gross debt
of the whole general government sector outstanding at year end (at nominal value).

13
In contrast, the annual is the difference between the spending and receipt in a year. Therefore,
government deficit (surplus) means the net borrowing (net lending) of the whole government
sector4
and is calculated according to national accounts concepts5
.
Gagnon (2011) finds that current public debt levels in many of the advanced European
economies will grow to unsustainable levels in the next couple of decades if major steps are not
taken to change the projected spending and revenue levels. Miller et al. (2010) also provided
other definitions of government debt on their previous work.
Much like a family needs a mortgage to finance buying a house, governments also need
financial support in order to finance its activity. To achieve this objective, Euro zone members
issue debt in the form of bonds that they sell to investors in exchange of an interest payment.
With the creation of the Euro zone the interest paid on bond financing have reduced with many
governments (including the Portuguese) increasing their financing in order to invest in the
country. In Portugal, the raising debt did not promote growth and there is also evidence that
there was some deterioration in the Portuguese fiscal position from the end of the 1990s until
2005 and that the favourable economic conditions of that period weren´t used to consolidate
(Braz, 2008). It is, therefore, important to analyse how debt is issued in the EMU and its main
features that allowed different Euro zone countries to increase their debt issued to
unsustainable levels.
4.4.1 Debt issuance in a monetary union
Throughout the years, the Portuguese public debt market has undergone far-reaching changes
that affected the structure and composition of its debt. The organisation responsible for
managing Portugal´s debt and executing its financing program, in accordance with the Public
Debt Law and the guidelines set by the government is the IGCP (Instituto de Gestão da
Tesouraria e do Crédito Público, I.P.,). Created on December 1996, its mission is to manage the
cash and direct debt of the central government in order to: (IGCP)
4
Includes central government, state government, local government and social securities funds.
5
European System of Accounts, ESA 95

14
1. Ensure stable Government financing and efficient management of the debt portfolio;
2. Minimize the cost of the government debt in a long-term perspective, in accordance with
the risk strategies defined by the Government;
3. Reduce the cash balances to acceptable minimum levels in view of the goal of reducing
the debt outstanding, thereby lowering the Government’s financial costs.
There are many differences between how Portugal issues debt in the euro area than before
entering the single currency. The introduction of the euro had a major impact on how debt
managers operate in the markets as the disappearance of exchange rate risks, within the EMU,
created the conditions for a pan-European market. Issuing debt in foreign currency instead of
local was seen as having more advantages. This strategy was used in many countries with a
weak currency to enable them to be more attractive to investors and, therefore, be able to
finance itself at lower costs (Wolswijk & Haan, 2005). As a small economy with narrow investor
base, Portugal took more recourse to foreign currency debt (Claessens, Klingebiel, &
Schmukler, 2003). As the exchange rate within the euro area no longer exist, with the adhesion
to the single currency, issuing in foreign currency is no longer relevant as in 2002 only 1.7% of
the total government central government debt of Portugal was issued in a foreign currency (all
was in US dollars) (Wolswijk & Haan, 2005).
Another important characteristic of government debt is the maturity. Debt management
agencies such as IGCP in Portugal are now given more strategic goals and guidelines mainly in
the form of limits in maturity. The average maturity of outstanding debt in the euro area is now
close to six years (Wolswijk & Haan, 2005). Since the start of the EMU debt issuance was
concentrated on 10 year bonds with all euro area members active in that market. Also the 3-, 5-
and 30- year segments also attractive for many debt managers including Portugal (Economic
and Financial Committee, 2000). There is also another important consideration by Miller (1997)
that argued that due to political instability causes inflation uncertainty which will be reflected in
higher interest rates for the long-term giving governments an incentive to issue a larger portion
of debt with short maturities.
The debt structure of Portugal changed considerably. Issues of about €2 billion Euros were
standard in smaller countries before the EMU, now the minimum issuance size is 5 billion with
longer maturity (Wolswijk & Haan, 2005)
Another area that is well documented in academic literature is the link between central bank
independence and debt maturity. Falcetti and Missale (2002) argue that the longer maturities in

15
bond issuance that occurred in the late 1980s and early 1990s were due to increased central
bank independence. As the ECB is an independent institution, it can be concluded that Portugal,
as a member state of the euro area, would lengthen its maturities.
With increased competition from sovereign issuers in the euro zone, Portugal has had two major
consequences: (Amor, 2001)
1 Overall reduction in the yield spread6
between Portuguese debt and other Euro zone
countries.
2 Contrary to the experience of other countries, the relative financing costs have
actually been pushed up due to Portugal´s lower borrowing requirement.
In order to raise debt, the Portuguese Treasury (IGCP) issues a wide range of securities,
including Treasury Bills (BT), fixed-rate (OT) and floating-rate (OTRV) in the domestic market
and Eurobonds, ECP, EMTNs and global bonds in international markets. The focus will be on
the OT bonds as they provide a benchmark role in money and capital markets.
Obrigações do Tesouro (OT) fixed-rate bonds are traded instruments with medium- (3 and 5
years) and long-term maturities (10 and 15 years) maturities. They pay a fixed annual7
interest
rate and the principal is redeemable at nominal value coupon maturity. These are the main
instrument used by the Republic of Portugal to satisfy its borrowing requirements.
As of February 2012, Portugal has € 103,451 million of outstanding OT lines and table 1
outlines the outstanding issues on 29/02/2012.
6
Yield spread is the difference between yields on different bonds. In this case, it is seen as the difference between
the amounts of interest paid between two countries.
7
A semiannual coupon was paid on bonds issued prior to 1994. These bonds were already redeemed.

16
Table 1: Outstanding OT issues
ISIN Issue
Coupon
Rate
Issued as
(years)
Outstanding
(€106
)
PTOTEKOE0003 OT 5% Jun 2012 5.000% 10 9,673
PTOTEGOE0009 OT 5.45% Set 2013 5.450% 2 9,737
PTOTE1OE0019 OT 4.375% Jun 2014 4.375% 11 6,000
PTOTEOOE0017 OT 3.6% Out 2014 3.600% 5 7,810
PTOTE3OE0017 OT 3.35% Out 2015 3.500% 10 9,649
PTOTEPOE0016 OT 6.4% Fev 2016 6.400% 5 3,500
PTOTE6OE0006 OT 4.2% Out 2016 4.200% 10 6,185
PTOTELOE0010 OT 4.35% Out 2017 4.350% 10 6,083
PTOTENOE0018 OT 4.45% Jun 2018 4.450% 10 6,887
PTOTEMOE0027 OT 4.75% Jun 2019 4.750% 10 7,665
PTOTECOE0029 OT 4.80% Jun 2020 4.800% 10 8,551
PTOTEYOE0007 OT 3.85% Abr 2021 3.850% 10 7,510
PTOTEAOE0021 OT 4.95% Oct 2023 4.950% 15 7,228
PTOTE5OE0007 OT 4.10% Abr 2037 4.100% 30 6,973
Source: IGCP and Tradeweb
4.5 Monetary Policy
Monetary policy is the instrument available, such as money supply and interest rate, in order to
influence target variables. These variables are related to three central macroeconomic
concepts: the unemployment rate, inflation rate and productivity growth (Gordon, 2003). The
ultimate goal is to influence these variables in order to improve economic growth.
The creation of a monetary union as a result of the Maastricht Treaty had an impact on the way
monetary policy is conducted in European countries. In fact, being part of the EMU created
challenges to all member states as the mechanisms of monetary policy have changed. This is a

17
relatively recent development and, therefore, the literature available on this subject is scarce.
On the other hand, the study of economy policy on a closed economy is more developed.
In every economy, one of the choices that have to be made by consumers is whether they
should keep money or invest in assets such as bonds or even a savings account. The
relationship between both is given by the interest rate (Carvalho, 2008). In fact, investing in
assets will give an interest rate in return and retaining money will give no return but the ability to
consume. Therefore, the value of the interest rate is the key variable for consumers. For
example, if the interest rate increases it becomes more attractive to invest in different assets
and in consequence the demand of money will decrease. The interest rate of a country is set by
its central bank. In Portugal, this was the role of the government controlled Banco de Portugal
until the creation of the Euro zone. Therefore, in a closed economy the government can easily
control the interest rate and set it according to the needs of the country (Alves, Correia, Gomes,
& Sousa, 2009).
There are two types of monetary policy that can be used by central banks. Blanchard (2008)
explains that an expansionary policy consists in increasing the supply of money so that the
interest rate decreases and, this way, stimulating investment and consumption. This policy is
adopted in times of recession in order to increase demand and create employment. The author
also adds that when an economy is growing rapidly with high inflation, a contractionary policy
should be used. This means that the central bank should reduce the supply of money in order to
increase the interest rate. This way, lending money will be less attractive and savings will
increase. Therefore, consumption will reduce and lack of demand will push prices down. It is
also important to note that neoclassical and Keynesian economics differ on the effects and
effectiveness of monetary policy.
In a monetary union, monetary policy is not directly available for a country. In fact, the interest
rate is set by the European Central Bank, a supranational institution that is government
independent and formed by the all Central banks of the euro area. Therefore, central
governments cannot directly control monetary policy directly. In consequence, if a country is in
recession and need a lower interest rate in order to boost consumption, the economic situation
of other member states have to be taken into account. If several of the member states are in a
healthy, the European Central Bank might decide to hold interest rate despite of the needs of
other member states. For this reason, a single country doesn´t have the ability to control on its
own the monetary policy.

18
The first objective of the ECB is not to promote growth for the euro zone member states. On the
Treaty on the Functioning of the European Union, Article 127 (1) the primary objective of the
ECB is to maintain price stability in the UEM. Nevertheless, the ECB should also support the
overall economy of the euro area contributing for full employment and a healthy economic
growth (ECB, European Central Bank, 2012).
In order to control the price stability of the Euro zone, the ECB can control and short-term
interest rate and can influence the money market conditions in the European market. This is
achieved because the central bank is the sole issuer of banknotes and provider of bank reserve.
The change of the interest rate in the European money market by the ECB will set a number of
mechanisms in motion that will influence economic developments. This process, known as the
monetary policy transmission mechanism, is very complex and despite being widely covered by
academic literature there is no unique and unquestionable understanding of all aspects involved
(ECB, The Monetary Policy of the ECB, 2004).
The ECB developed a view on how the transmission mechanism works. The central bank
provides funds to the Euro zone banks and charges an interest in return. Therefore, as the ECB
is the only institution with the power to issue money, it can fully determine the interest rate of the
Euro area. A change on the interest rate will affect directly money market and indirectly the
lending and deposit rates that are set by individual banks to its customers. Also, a firm and
credible central bank can guide economics agents´ while setting monetary policy. In fact, by
affecting expectations of future interest rate changes, economic agents’ don´t have to increase
their prices on fear of inflation or decrease their prices with fear of deflation.
Having an impact on financing conditions, the ECB´s monetary policy can affect other financial
variables, for example asset prices and exchange rates. For instance, if the interest rate
increases, it is less attractive for economic agents to take a loan to finance consumption or
investment, ceteris paribus8
. Also, movements in asset prices can affect consumption and
investment: if equity prices rise, investors become healthier and, therefore, may choose to
increase the consumption; on the contrary, if equity prices fall, investors may reduce the amount
of money they use for consumption. Higher interest rates (or the expectation of higher interest
rates in the future) may also affect the concession of credit. In fact, a higher interest rate means
a higher risk for the lender as the expenditure with interest payments is higher for the borrower,
which makes it more likely to fail to pay back their loans (Brandão, 2003).
8
Financial term used in Economic Theory as meaning everything else equal.

19
Changes on consumption and investment will have an effect on the demand and supply of
goods and services. A basic Macroeconomic concept explains that when demand exceeds
supply, the price of a good or service is will move upward. Also, on the contrary, if supply
exceeds demand, the price is likely to move downward (Samuelson & Nordhaus, 2009).
Furthermore, changes on aggregate demand would favour or prejudice labour markets which
can have an effect on price and wage setting.
The exchange rate changes also have a role in this transmission mechanism, mainly in three
different ways. First, a change on an interest rate will have effect on the price of imported
goods. If the exchange rate appreciates/depreciates the price of imported goods have the
tendency to fall/rise (Copeland, 2008). Second, if the imports are used in the production of
goods, different exchange rates would mean different final goods prices. Third, the impact can
also be seen in of competitiveness of goods produced internally on international markets. In
conclusion, an appreciation on the Euro zone exchange rate would reduce inflationary pressure.
The process described is long, variable and uncertain. Monetary policy is, therefore, difficult to
set and takes a considerable amount of time to take effect. Also, the strength and effectiveness
of the transmission mechanism depends on the state of the economy. Therefore, it is very
difficult of the ECB to set a monetary policy for countries with different sizes and economic
development, such as Portugal and Germany. Furthermore, this mechanism is also influenced
by external unexpected events, such as changes in fiscal policy, moves in commodity prices,
shifts in risk premium, changes in bank capital and different sentiments in the global economy.
The transmission mechanism is resumed on Figure 1.

20
Figure 1: Monetary Policy Transmission Mechanism
Source: European Central Bank
As seen above, the creation of the Euro and the monetary policy being set by the European
Central Bank created a major challenge for European countries. Also, the issue of monetary
policy in a monetary union is still recent. The literature is divided in two different branches:
analysis of a closed economy in an optimal monetary policy; and, analysis of optimal exchange
rate regime (Alves, Correia, Gomes, & Sousa, 2009).
The most representative paper on the first branch of conduct was presented by Benigno (2008)
who tries to analyze how special features of different regional economies should be taken into
account in the central bank’s conduct of monetary policy. The question made in this research is
how will monetary policy optimally work in a currency are that is characterized by asymmetric
transmission mechanism and national differences.
Regarding the second branch of literature, it assumes that an optimal exchange rate regime is
determined when taking into account a set of open economies and the monetary policy is set for
each economy by a central planner (Corsetti & Pesenti, 2001). In the case of the EMU this
central planner would be the European Central Bank. Furthermore, most of the literature

21
assumes that the quantity of money can affect aggregate demand directly (for more see Duarte
and Obstfeld (2008) and Devereux and Engel (2003)).
4.6 Relation between government debt and economic growth
The relationship between government debt and economic growth has been subject to scarce
literature, particularly concerning the euro area. Theoretical literature done over past decades
suggests that there is a negative relationship between public debt and economic growth.
Contributions by Buchanan (1958) and Meade (1958) were refined by Modigliani (1961) to
argue that public debt is a burden for future generations as there is a reduced flow of income.
Adam and Bevan (2005) conclude that and increase in government spending will enhance
growth if the level of public debt is low enough.
Focusing on the impact of fiscal policy, Saint-Paul (1992) and Aizenman et al. find a negative
relation between public debt and economic growth using endogenous models.
Several other theoretical contributions focused on the adverse impact of external debt on the
economy. Krugman (1988) and Cohen (1993) argue that up to a certain level foreign debt can
promote investment that will increase economic growth. However, beyond a certain level, debt
will negatively affect investors and their willing to provide capital. Also Aschauer (2000)
proposed a growth model where an increase in debt would impact growth positively up to a
certain threshold level from which be impact would be negative.
There is also some empirical evidence on this subject but is primarily focused on developing
countries. Pattillo et al. (2002) find that the impact of external debt on economic growth is
positive for levels below 35-40% of GDP but negative for higher values. The same relationship
is studied by Clements et al. (2003) and they find that the threshold level is between 20-25% of
GDP. Reinhart and Rogoff (2010) analyzed a sample of 20 countries for a period of two
centuries (1790-2009) and found that for levels of government debt of below 90% of GDP there
is a weak relation between debt and economic growth; however, for levels above 90% the
average economic growth falls by more than 1%. This evidence is also present in the work of
Kumar and Woo (2010).

22
Checherita and Rother (2010) investigated the impact of government debt on economic growth
focusing in 12 euro area economies over a period of 40 years. The study shows a non-linear
impact of government debt on economic growth with a turning point of about 90-100 % of GDP.
Beyond this level, the government debt to GDP as a negative impact on long term growth.
Furthermore, the authors also found evidence that public debt and government deficit are
negatively and linearly associated with per-capita GDP growth.
There are also studies that find no correlation between economic growth and government debt.
Schclarek (2004) studied a sample of 24 countries for data between 1970 and 2001 and found
no significant relation between both variables. A more recent study by Panizza and Presbitero
(2012) also found no evidence that high public debt will negatively impact economic growth in
developed economies. It doesn´t mean, however, that countries can sustain any level of debt as
there is a level of debt that is unsustainable. What their results indicate is that the countries in
the sample did not achieve such level of debt yet.

23
5. RESEARCH METHODOLOGY
5.1 Research Method
The purpose if this dissertation is (1) to compare the evolution of economic growth in Portugal
from the adhesion to the European Economic Community in 1986 until the Euro era; (2)
evaluate the changes on the characteristics of debt issuances before and after the creation of
the Euro; (3) evaluate and compare the public debt and government deficit between 1986 and
2010; and (4) investigate the relation between these indicators. In order to achieve the results
proposed, the method that will be used is quantitative research.
Quantitative research relies on the collection and analysis of data. It adopts the scientific
method and the focuses are on controlling variables, gathering evidence and coming to general
conclusions and provide explanations. This research will use data from 25 years, between 1986
and 2010 in Portugal.
Quantitative research focuses primarily on the collection of quantitative data. The method is to
test hypotheses and theories with data available. Data is mainly collected based on precise
measurements and instruments and using reliable providers. This dissertation will analyse data
from the National Institute of Statistics (INE), the AMECO database from the European Union,
the Portuguese Treasury and Government Debt Agency (IGCP) OECD and World Bank
databases. Furthermore, some calculations will be done by the author in order to have a more
detailed analysis of the data available. Using this type of research will allow to study the
behaviour of the indicators in analysis.
The first part of the research will focus on the collection and analysis of data. The aim will be to
identify differences and similarities between different periods of time. This part will focus on the
theoretical analysis of the data applying it to the economic context of each period of time. The
first part will be divided in three different periods in order to distinguish between different stages
of the European integration. Therefore, the first period will focus on the period that follows the
adhesion to the European Economic Community. The second period will include the preparation
for the Euro area, therefore, will start on 1992, the year of the signature of the Maastricht Treaty
that created the basis for the European Monetary Union. Lastly, the third period will focus on the
Euro area.

24
The second part will be focused on the study of debt issuances before and following the
creation of the Euro zone. The main method will be data collection and analysis. The aim is to
concentrate the most possible numerical data and taking conclusions from its analysis. Also,
some calculations will be provided in order to provide the research with more detailed
information and get to important conclusions. Therefore, even if the approach is still quantitative,
there will be a more practical explanation of the results obtained than in the first part.
Part three of this research will focus on the debt ratio and government deficit. Again, data from
25 years will be collected and thoroughly analysed in order to evaluate the evolution of both
indicators. It will also aim to explain the differences on the behaviour between the period when
Portugal had its own currency, the Escudo, and the period following the creation of the single
currency. The research encountered on this part its main limitation. As there is no data available
for the government deficit from the period between 1986 and 1994, it was only possible to test
the evolution of this variable in the period of preparation for the Euro and the Euro area.
The fourth part of the methodology will be focused on a more practical approach. In order to
investigate whether there is a relation between economic growth and government debt as a
percentage of the GDP, a statistical model will be used in order to come to a conclusion. The
model that can better explain this relation is the Pearson’s correlation. The aim is to track the
influence of the variables in each other and also the strength of such relationship. Data from the
25 years in study will be gathered the possible results and hypothesis will be presented and the
statistical measure will be calculated. Finally, in order to test the relevance of the result
obtained, a significance test will be made. The aim of this test is to be sure that the conclusion
drawn by the Pearson’s correlation is not attributed to chance, and that it is in fact relevant.
5.2 Economic Growth
This section will focus on the study of economic growth in Portugal. Taking advantage of data
available from the European Union’s AMECO database, the research will be focused on the
evolution of the Gross Domestic Product (GDP) growth between the years of 1986 until 2010.
The study of the evolution of this variable will be divided in three different periods.

25
First, the research will be focusing on the period following the adhesion to the EEC. This is an
important period as it marks the start of the European integration for the Portuguese economy.
This period will go until 1991 as this is the year before the signature of the Maastricht Treaty.
In 1992, the signature of the so-called Treaty of the European Union was the beginning of a new
era of European integration. The decision to create a single currency is one of the major
developments of the past decades and European countries had to prepare for this event.
Therefore, the second period will focus on economic growth of Portugal during the preparation
for the European Monetary Union until the official introduction of the Euro in 1999.
Finally, the third period in study will be focusing on the behaviour of the Portuguese economic
growth during the Euro area and will end on 2010.
5.2.1 1986 – 1991: From EU adhesion to Maastricht Treaty
Following a long period of dictatorship (1933 – 1974) where numerous barriers to the free
circulation of people and goods were imposed, Portugal took the opportunity to open up its
frontiers by applying to the European Union membership on 1977. European members saw with
concern the Portuguese adhesion to the European Union due to the degrading social and
economic situation of the country. Nevertheless, the adhesion was in the centre of all political
efforts in the country and since 1985 Portugal began a period of economical expansion. These
efforts finally payout when, on the 1st of January 1986, Portugal joined the European Economic
Community alongside Spain.
As the development level in Portugal was lower than other member states, structural funds were
received in order to close the development gap with the other EEC members. Following the
adhesion to the EEC in 1986 Portugal went through a period of increasing growth rates which
was leading the country toward conversion with European peers (Roubini, Parisi-Capone, &
Menegatti, 2007). In fact, the economic growth increased from 4.14% in the end of 1986 to a
high of 7.49% in 1988 – Figure 2. Despite the growth rate decreasing in subsequent years,
Portugal was going through a period of high growth rates until 1991. The average growth rate
between 1986 and 1991 is 5.4% benefiting from political stabilization, healthy external climate,
funds from EU and an expansionist monetary policy. These high economic growth rates resulted

26
in a high convergence period with the difference between the Portuguese and EU15 economic
growth being positive every year (Aguiar-Conraria, Alexandre, & Pinho, 2010). Also, we have
seen the highest convergence of the last few decades in the period between 1987 and 1990
(Amaral, 2010). Therefore, during the years following the adhesion to the EEC the behaviour of
the Portuguese economy was positive with the smallest economic growth being 3.95% on 1990.
Figure 2: GDP Growth 1986-1991 (annual %)
Source: AMECO database
From the data collected in various periods, the years between the EEC adhesion and the
Maastricht Treaty were encouraging in terms of economic growth. Being part of an European
project contributed to a stable and positive economic growth and development of the country.
Inflow of funds from the EEC and increased trade ties with other member states enabled
Portugal to achieve such successful growth rates.
5.2.2 1992 – 1999: From Maastricht Treaty to Euro
After the Maastricht agreement in 1992 Portugal started to prepare for the Monetary Union. This
meant that the following criteria agreed on the Maastricht Treaty had to be achieved in order to
become founding a member of the European Monetary Union>
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
1986 1987 1988 1989 1990 1991

27
1. Inflation rates shouldn´t be more than 1.5pp of the average of the three EU member
states with lower inflation.
2. Government Debt shouldn´t be more than 60% of GDP and the ratio of the annual
government deficit to GDP must not exceed (but should be close) to 3%
3. EU member states applying for the Monetary Union should be members of the
exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for a
minimum of 2 years and should not devaluate its currency during that period.
4. The nominal interest-rate of a member state shouldn´t be 2pp higher than in the three
lowest inflation countries.
As explained in the previous section, the years following the EEC adhesion brought economic
growth and convergence between Portugal and the other member states. The structural and
cohesion funds transferred from European institution to Portugal supported the growth of the
economy and the development of the industrial sector. Portugal became a leading exporter in
several industries such as textiles, ceramic and footwear. The standard of living also showed
very positive improvements. However, despite being a high income and developed country,
Portugal had the lowest GDP per capita among the other western European countries according
to data from the Eurostat.
During this period Portugal did a real effort to converge against the other EU members but the
conditions of the Portuguese economy have deteriorated. Furthermore, the Escudo has suffered
the impact of the exchange crisis9
that emerged in Europe between mid 1992 and mid 1993.
Therefore, we have seen in 1993 the first year with negative growth rates since 1983 and it only
happened again in 2003 which reflects a deterioration of the world’s economy.
Following the exchange crisis, the economic conditions have improved and efforts were taken in
Portugal in order to comply with the Maastricht rules in order to become a founding member of
the EMU. However, regardless of having seen an improvement on the economic conditions and
achieving growth rates between 3.69% (1996) and 5.14% (1998) the average economic growth
fell substantially from the last period to 2.5% – Figure 3.
9
European currency crisis in 1992, also known as Black Wednesday, refers to the events of September 1992 when
the British government had to withdraw the pond from the European Exchange Mechanism after being unable to
keep it above the agreed lower limit. For more on this see Budd (2005)

28
Additionally, despite having a positive growth rate throughout the period, the economic
development of the country diverged from the other European member states. However, we can
conclude that the behaviour of the Portuguese economy was still positive during this period.
Taking out the adverse macroeconomic event that was the exchange rate crisis in 1992 and
1993, the Portuguese economic had an average growth of 3.70 percent, which is more than 1
percentage point higher than the overall period and closer (but still well below) to the 5.46 per
cent of the previous period. The overall performance of the country during this period enabled
Portugal to join the EMU.
5.2.3 1999 – 2010: Euro era
This is an important period in the History of Portugal and the European Union as the Euro was
officially introduced. Following a three year period of adaptation which started in 1999 where the
euro was official but only existed as “book money”, on the 1st
of January 200210
euro banknotes
and coins were introduced in Europe. With low interest rates and inflation, the Portuguese
government did several public investments (such as the UEFA Euro 2004 championship and a
10
The dual circulation period – when both the Portuguese escudo and the euro had legal tender status – ended on
the 28
th
February 2002.
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
1992 1993 1994 1995 1996 1997 1998

29
number of new motorways) that rose the public expenditure to unsustainable levels and had
little impact in promoting sustainable growth.
This period was characterized by a stagnation of economic activity – the economic growth rate
average was 1.2% from 1999 until 2010. Following the introduction of the Euro, Portugal faced
negative economic growth rates of 0.91% in 2003 and both 2008 and 2009 with rates of -0.1%
and -2.91%, respectively – Figure 4. Furthermore, unlike the other two periods in this analysis
where we could notice a trend on the growth rates, there is no obvious trends in this period. We
can see a decrease on the growth rate between 1999 until 2003 and an increase in the
subsequent period until 2007 where the growth rates begin to decrease again. The economic
growth rate fell in this period from 4.07% in 1999 to a negative growth of almost 3% in 2009.
There is also little evidence of per capita GDP convergence between Portugal and the other 11
member states (Roubini, Parisi-Capone, & Menegatti, 2007). Aguiar-Conraria et al. (2010) went
a bit further concluding that there is evidence of divergence between Portugal and the UE15,
with an accumulated growth of 8.6% and 11.8% respectively. Therefore, a conclusion that can
be drawn is that Portugal is not in line with the performance of other countries in Europe in this
period which contributed for a worsening of the countries’ economic situation.
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

30
This period is also characterised by the subprime crisis that erupted in the US in 2007 and
rapidly expanded to Europe. The crisis started on the real state sector in the US between poor
families with high default risk (subprime). The on housing prices led to a crisis on the financial
sector which led to losses on banks (Silva, 2007). The globalisation of investments in the
financial sector spread a localised crisis in a global crisis that affected Europe in general and
Portugal in particular. This is one of the main reasons for a low economic growth from 2007
onwards (it was actually negative in 2009).
5.3 Government Debt Issuance
Issuing debt has always been the main source of financing for European countries. Debt
issuance is a way for a government to raise money in order to finance its daily operations. It is
an alternative way to borrowing money from banks. Bonds are issued and then sold in the open
market and the investor will earn an interest (coupon) in return. In the end of the period of time
agreed (maturity) the issuer has to pay back the amount invested (Fabozzi & Mann, 2012). The
purpose of this section is to analyse the difference in terms of debt issuance occurred in
Portugal with the introduction of the Euro.
Since the adhesion to the EEC in 1986 until the end of 1998, Portugal issued a total of 41,995
million Euros11
in 121 issuances. Throughout this period, Portugal issued not only on its local
currency (Escudo) but in several other currencies in order to become attractive to international
investors. In order to raise debt, the Portuguese Government issued debt in 11 different
currencies (including Escudo). Figure 5 summarizes the distribution of debt per currency in
Portugal between 1986 and the end of 1998. We can conclude that despite issuing most of the
bonds is Escudos, Portugal issues more than a third of government debt in other currencies, in
particular US Dollar (23 per cent). It also issued in Japanese Yen and Deutsche Mark (both 7
per cent). Other currencies include the Australian Dollar, British Pound, French Franc, Italian
Lira, Dutch Guilder, Spanish Peseta and Swiss Franc.
11
See appendix 2 for the calculations and details of the total debt issued during this period.

31
Figure 5: Debt issuance per currency 1986-1998
Source: Reuters and author´s calculations
Following the signature of the Maastricht Treaty in 1992, Portugal (and the other Euro zone
countries) was allowed to issue debt in the new currency. Therefore, since 1993 Portugal
started issuing bonds in the new currency and an interesting conclusion comes to mind:
Portugal issued more debt in Euros from 1993 until the end of 1998 than in all other currencies
combined from 1986 until 1998 – Figure 6. In fact, Portugal issued 174,505 million Euros in this
period against the 41,995 Euros of debt issued in other currencies since Portugal joined the
EEC.
With the beginning of the Euro in 1999, the objective of debt management agencies remained
the same as before: financing of public debt at low costs with acceptable risks. Many other
changes, however, were introduced concerning how Governments issue debt.
2
7 7
60
23
Other Deutsche Mark Japanese Yen
Portuguese Escudo US Dollar

32
Figure 6: Percentage of Debt Euro/Other Currencies
Source: Reuters and author calculations
With the introduction of a common currency, European Governments (mainly smaller
economies such as Portugal) have an easier access to capital markets and wipe away one the
main risks they incurred in the past – exchange risk 12
. This created conditions for the
introduction of a pan-European capital market which ultimately resulted on Euro Governments
becoming direct competitors in the European market. Before the introduction of the Euro,
Portugal issued some debt in stronger currencies, mainly dollar in order to decrease this risk
and become more attractive for foreign investors. The decision to issue debt in a foreign
currency is motivated by several factors such as taking advantage of better financing conditions
in foreign countries (Wolswijk & Haan, 2005). Smaller countries, such as Portugal, used to take
more recourse to foreign currency debt than stronger economies (Claessens, Klingebiel, &
Schmukler, 2003). However, since the creation of the single currency Portugal has lowered the
percentage of debt issuances in foreign currency. In 2000, the IGCP has only issued 2.3% of
bonds in American dollars and in 2003 issuances other currency than the euro were inexistent –
Table 2.
12
In this context, exchange risk is the risk of the value of the bond decrease due to fluctuations on the currency
value (Shapiro, 2010).
81
19
Debt Euro (1993-1998) Debt Other Currencies (1986-1993)

33
Table 2: Bonds issued in foreign currency
Year Percentage of USD debt
1999 8.6
2000 2.3
2001 0.6
2002 0.1
2003 0.0
2004 0.0
2005 0.0
2006 0.0
2007 0.0
2008 0.0
2009 0.0
2010 0.0
Source: IGCP
Another change that should be taken into account is the residual maturity of government debt in
the euro area. Having a single strong currency that eliminated exchange risk and lower
financing costs, euro zone countries used this favourable environment to modify their bond
maturity strategy. There were however two different strategies that were used by different
countries. While some countries (mainly high-debt countries) have taken the opportunity to
expand longer term financing, others increased the issuance of short term government bills
(mainly to establish benchmarks in this segment). Table 3 below gives us an overview of the
Government debt issues in Portugal for 1998 and 2010 where many differences come to mind in
relation to the new characteristics of the market:

34
Table 3: Government Debt Issues - Funded debt
(in a calendar year perspective)
EUR millions 1998 2010
Treasury Bonds (OT)13
8,517.5 21,713.7
< 5 years 287.2 0.0
5 years 2,860.7 1,801.8
10 years 3,014.8 15,210.2
15 years 2,354.8 4,701.7
30 years 0.0 0.0
Short-term14
1,874.0 25,723.0
Saving Certificates (SC)15
1,122.4 203.9
Treasury Certificates (TC) - 684.7
Other16
315.9 2,802.7
Total debt 11,829.9 51,128.0
Source: IGCP
The first conclusion to take from the analysis of the data provided by IGCP is that there was a
massive increase on the amount of debt issued by Portugal from the years in discussion (from
11,830 in 1998 to 51,128 million Euros in 2010). This increase means that the total debt of the
country in 2010 was 432.19% higher than the year before the introduction of the euro.
Furthermore, we can conclude that the biggest increase was in short-term debt rather than
Treasury bonds (short term debt increased 1,372.64% whilst long term debt increased
254.93%). Therefore, Portugal took the opportunity to establish short term benchmarks in this
period which led to a shift on its debt issuances characteristics: the biggest amount of Portugal
debt issuances are made on short term paper by the end of 2010 in contrast to what was
13 At nominal value and according to the original maturity of the respective Tbond. Includes EURO-OT in 1998.
14 Includes Treasury bills, ECP, Repos, CEDIC, and money market credit loans.
15 Excludes accrued interest.
16 Excludes Promissory Notes.

35
observed before the introduction of the Euro. Figure 7 and 8 shows the type of issuance in 1998
and 2010 respectively.
Figure 7: Government Debt Issue Split 1998
Source: IGCP and author´s calculations
Figure 8: Government Debt Issue Split 2010
Source: IGCP and author´s calculations
Portugal raised 50 per cent of its debt in the capital markets through short term bonds and only
42 per cent in Treasury bonds. Saving Certificates, Treasury Certificates and other type of debt
72%
16%
12%
Treasury Bonds (OT) Short-term SC, TC, and Others
42%
50%
7%
Treasury Bonds (OT) Short-term SC, TC, and Others

36
are in 2010 only 7 per cent of total debt raised. There is a clear distinction from the
characteristics of the Portuguese debt before the Euro was adopted. In fact, the majority of the
debt raised was in long term paper, as Treasury Bonds accounted for 72% of the total.
Furthermore, the short term bills and Saving Certificate, Treasury Certificates and others were
16 and 14 per cent respectively.
5.4 Debt ratio and public deficit
Despite not being the central focus of European institutions in the initial stage of the euro area,
the revised Stability and Growth Pact increased the importance of debt ratio at European Level.
Therefore, each member state cannot exceed a limit of 60 per cent of GDP on its government
debt.
In 1986, the debt ratio in Portugal was well below the 60 per cent threshold reaching 50.22 per
cent of GDP and in 1997, the relevant year for the participation in the euro zone, the gross debt
was 54 per cent of GDP. During the first years following the foundation of the euro area, this
variable remained stable but since 2002 it started to rise considerably reaching the 60 per cent
limit imposed in the Stability and Growth Pact in 2005 (62 per cent of GDP). Throughout this
research, the conclusion was that Portugal didn´t take the opportunity to boost its economic
growth consistently since the adhesion to the EU. Therefore, with the country´s debt rising and
economic growth stagnating, the ratio of debt to GDP increased to historical levels in Portugal.
This led the debt as a percentage of the GDP to rise above the 60 per cent level admitted by
Brussels in the Stability and Growth Pac in 2005 (62.75 per cent). On the following years the
rising trend continued with the level reaching a high of 93 per cent of GDP in 2010. Figure 9
shows the evolution of Gross Debt as a percentage of GDP since the adhesion to the European
Union in 1986 until 2010.

37
Figure 9: Gross Debt as % of GDP
Source: AMECO Database and OECD
We can conclude from the figure that the behaviour of this variable was stable between 50 and
60 per cent since Portugal joined the EEC and the creation of Euro. Since the adhesion to the
single currency, the Portuguese debt as a percentage of GDP started its rising trend until the
2010 all time high.
Another economic indicator that has been deteriorating since Portugal joined the Euro is the
government deficit. In order to cope with the Maastricht Treaty rules to allow Portugal to be one
of the founder members of the Euro, a great effort was done by the Portuguese government to
reduce the deficit to the 3 per cent limit imposed. One of the main difficulties of this research
was regarding the information available for the government deficit. In fact, this data is only
available from 1995 which made difficult to evaluate the performance of this variable from when
Portugal joined the EEC in 1986. Despite this limitation, it is still relevant to study the evolution
of the Portuguese deficit throughout the end of the 1990s until 2010.
In 1995, the Portuguese public deficit was sitting at 5.0 per cent, above the threshold imposed
by the European Union. Therefore, the Portuguese government did a great effort in order to
reduce this value and converge to the 3.0 per cent limit. Some measures were taken such as an
increase on the VAT and a reduction on expenses. Also, this period was fertile in privatizations
30
40
50
60
70
80
90
100
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
Gross Debt as % of GDP Limit

38
of several public companies that helped to reduce the deficit. This process was criticized in the
Portuguese society as they were seen as temporary measures that did not reduced the deficit
sustainably (Santos, 2007). These measures have pushed the deficit to a level closer to the 3.0
per cent limit in 1996, 1997 and 1998, with 4.5, 3.4 and 3.5 per cent respectively. However, only
in 1999, Portugal was able to achieve a deficit below the limit reaching 2.7 per cent.
Furthermore, during these years, this variable was above the Euro area average, even
considering the 17 countries that now form the Euro area – Figure 10. Moreover, since 1996,
the Portuguese deficit was always above the Euro area average (with one exception in 2003,
with Portugal touching the 3 per cent level and the Euro area countries´ average was sitting at
3.1 per cent).
In the year of the adoption of the Euro, the Portuguese deficit was slightly below the target but
has quickly gone up to levels above the limit. In 2001, the deficit was again above the target
before going below again in 2002 and 2003, sitting at 2.9 and 3 per cent respectively. From
2004 onwards, the Portuguese deficit was above the 3 per cent target every year, with a high of
10.1 per cent in 2009. During this period, the lowest deficit achieved by the country was 3.1 per
cent in 2007, the year of the start of the financial crisis. Again, this year was characterized by a
set of privatizations that led the deficit to a level very close to the limit imposed which was again
seen as unsustainable and even unreal. Therefore, only two years later the deficit achieved the
high of 10.1 per cent and 9.8 per cent in 2010. An important event that can justify the struggle of
the country to comply with the 3 per cent limit was the financial crisis of 2007 which resulted in
higher deficits and overall debt issued in European countries and Portugal was no exception
(Maior, 2011).

39
Figure 10: Government deficit as % of GDP
Source: Eurostat
In conclusion, it is fair to say that throughout the Euro zone period, the Portuguese deficit has
been through a very complicated period. In fact, having a deficit of 10.1 per cent is worrying as
is the fact that during the 12 years of the Euro creation in 1999, only on 3 of them Portugal was
able to have a deficit below the target set by the Maastricht Treaty and the Stability and Growth
Pact. However, the effort made by the Portuguese government during the preparation for the
Euro was very positive and able to achieve the objectives proposed, mainly to reduce the deficit
to below the 3 per cent level.
5.5 Government Debt and Economic Growth in Portugal
To investigate the relationship between GDP growth and government debt ratio the data
available from the period since Portugal joined the EEC in 1986 until 2010 that was presented in
previous sections will be used. The aim is to compare both variables and investigate any direct
relationship between both in Portugal. In order to do so, a statistical study will be presented. The
method used to identify any direct relationship between economic growth and government debt
as a percentage of the GDP will be the calculation of the Pearson correlation between both
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Euro area (17 countries) Portugal

40
variables. Correlation is a statistical measure used to calculate the interdependence of different
variables. It is a technique used to investigate the relationship between two quantitative
variables. The Pearson’s correlation measure the strength of such association. In this case, the
value obtained indicates how much a change in one variable, in this case GDP growth, is
explained by the change in the other, in this case Government debt as a percentage of GDP
(Field, 2009).
The calculation of the Pearson correlation coefficient can be done using the following formula:
Where x1,x2,...,xn are the values of the GDP growth and y1, y2,...yn are the values of
Government debt as a percentage of the GDP. Furthermore,
and
are the arithmetic averages of the GDP growth and Government debt as a percentage of the
GDP, respectively. Also, cov(X,Y) represents the covariance between the economic growth and
debt ratio, var(X) and var(Y) are the variance of economic growth and debt ratio respectively.
The calculations for all these parameters are available on Appendix 3. Finally, it is important to
realise that the value of the Pearson correlation will always be between +1 and -1:
𝜌 = 1: means that there is a perfect positive correlation between both variables. In this
case, it would mean that if the Government debt as a percentage of the GDP increases
by 1 percentage point, the same would occur to the GDP growth;
𝜌 = −1: means that there is a perfect negative correlation between both variables. In this
case, it would mean that if the Government debt as a percentage of the GDP increases
by 1 percentage point, the GDP growth would decrease by the same amount;
𝜌 = 0: Means that both variable don´t have a no linear dependency. Should this happen,
further investigation through other means will be required.

41
Furthermore, the strength of the correlation depends on the value obtain:
+.70 or higher: Very strong positive relationship
Between +.40 and +.69: Strong positive relationship
Between +.30 and +.39: Moderate positive relationship
Between +.20 and +.29: Weak positive relationship
Between +.01 and +.19: No or negligible relationship
Between -.01 and -.19: No or negligible relationship
Between -.20 and -.29: Weak negative relationship
Between -.30 and -.39: Moderate negative relationship
Between -.40 and -.69: Strong negative relationship
-.70 or higher: Very strong negative relationship
Data for GDP growth and government debt ratio for Portugal were presented in the last section
and will be used for the calculation of the correlation between both variables. Therefore, for the
period between 1986 and 2010, he Pearson’s correlation coefficient between economic growth
and government debt ratio for Portugal is -0.4117
. This value means that there is a strong
negative correlation between both variables. Therefore, since Portugal joined the EEC in 1986
until 2010 an increase in government debt ratio impacts negatively the economic growth.
The result obtained using the Pearson’s correlation clearly states that there is a strong negative
relationship between the two variables in question. However, before taking any conclusion it is
important to identify the significance of the value obtained. The intention is to understand
whether the Pearson’s correlation calculated with this sample is unlike to happen by chance.
Statisticians are able to the likelihood of a result obtained between two variables could have
happened by chance. If the result calculated is less than 5 per cent, it means that the observed
relationship is significant, as there is only one in a twenty change that it has happen by chance.
The calculation of the significance can be done using the following formula:
t =
r
sqrt[(1—r2
)/(N—2)
17
For details on the calculation see Appendix 3. MS Excel was used for these calculations.

42
With t being the probability of the result occurred by chance, r the Pearson’s correlation and N
the number of observations used. Using this data available we calculate a probability of 2.09 per
cent of the findings being caused by chance.
Therefore, combining the strong negative relationship of -0.41 with the significance test of 2.09
per cent, it can be concluded with a high level of certainty that an increase on the Portuguese
debt ratio will contribute for a decrease on the economic growth.

43
6. DISCUSSION OF FINDINGS
The intention of the research presented on this dissertation is to present the evolution of the
Portuguese economic growth and its Government debt between 19866 and 2010. From the
moment Portugal joined the EEC a huge effort was made in order to promote growth and
convergence with the other member states. Structured funds were transferred from European
institutions to Portugal in order to support the development of the country and the results were
positive.
Since Portugal joined the EEC the behaviour of the GDP growth was encouraging sitting
between 1.04 and 6.44 per cent until the currency exchange crisis of 1992 and 1993. During the
period between joining the EEC and the creation of the Euro, Portugal had a negative growth
only once when the exchange crisis emerged. Until 1999, the average economic growth was
3.88 per cent. On the other hand, upon adhering to the Euro, the behaviour of the Portuguese
economic growth has deteriorated. In fact, since 2001, the year the Euro started to circulate the
average GDP growth was only 0.69 per cent, with a high of 1.97 per cent and on three years the
country was in recession (2003, 2008 and 2009). The main conclusion taken is that the
performance of Portugal in terms of economic growth was very satisfactory following the
adhesion to the EEC in 1986. The country was able to converge with its European peers and
the economy was improving every year. However, what was found during this research was that
from the moment the Euro was created, performance of the Portuguese economy was much
worst with three years in recession as well.
The study of the government debt was also a focus during the research. In the period before the
creation of the single currency Portugal had a government debt of between 49 and 59 per cent,
which is below the 60 per cent limit imposed in 1992 by the Maastricht Treaty as a condition to
join the Euro. However, since the UEM was created the government debt as a percentage of the
GDP started increasing and in 2005 overcame the 60 per cent limit. Furthermore, the debt ratio
kept increasing on subsequent years reaching 93 per cent in 2010, the highest value on the
period under analysis.
In order to raise debt, governments use capital markets to sell bonds to investors. These
instruments became widely used by Portugal following the creation of the Euro. As discussed on
sections 4.4 and 5.2, the characteristics of debt issuances have changed since the creation of
the UEM. European integration eased access to the capital markets and eliminated exchange

44
risk in Europe which allowed Portugal to raise its debt issuances and reduce costs at the same
time. Since the Maastricht Treaty Portugal increased its amount of debt issued having over
21,000 million Euros of debt outstanding in 2010, much higher than the 8,000 million Euros in
1998. Another conclusion drawn in the research is that Portugal now only raises debt in Euros
despite issuing 40 per cent of debt in other currencies that not the Escudo between 1986 and
1998.
Another finding of this research was the relationship between debt ratio and economic growth.
In order to assess whether the two most important variables on this research had an impact on
each other an important statistical test was used: the Pearson’s correlation. Using data collected
from the period between the adhesion to the EEC and 2010 for both GDP growth and
government debt as a percentage of the GDP, the correlation was calculated and the result of -
0.41 suggests that when there is an increase on the debt ratio the value for the economic
growth will decrease. Also, in order to understand the significance of this result, a probability
test was used. The finding was that there is a probability of 2.09 per cent that the Pearson’s
correlation was obtained by chance, which means that the result is extremely significant.
Over the course of this research some gaps on existing research were identified. The creation
of the European Monetary Union completed changed the paradigm of European integration.
Therefore, the euro zone member states had to adjust and adapt to the new market conditions.
The literature concerning the differences on the characteristics and procedures of debt issuance
in Europe is still very scarce. Furthermore, the changes on the amount of debt owed by
European governments have hugely increased but it is still missing in depth studies regarding
this subject. Finally, a limitation that has affected this research is the data available. For
example, the study of the deficit in Portugal is extremely difficult as data is only available from
1995. Thus, any statistical study using this variable is less significant as the sample is not large
enough to be able to provide clear answers.

45
7. CONCLUSION
The aim of this investigation was to assess the differences between the economic growth
behaviour and public debt in Portugal between 1986 and 2010. The reason why the aim of this
investigation didn´t went further back is that the main idea was to identify differences on those
variables between the period following the Portuguese adhesion to the European Union (in 1986
still called European Economic Community) until the creation of the Economic and Monetary
Union.
This research begins by giving a historical overview of the Portuguese European integration.
The developments on the European Union as a whole are also presented in order to put the
research into context. Furthermore, the creation of the Euro zone was a focal point throughout
the research and a brief overview of its costs and benefits was presented.
One of the major changes occurred when the EMU was created was the features of debt
issuances. The most obvious finding was that Portugal have hugely increased its amount of
debt issued as well as changed the maturity of its bonds. Furthermore, Portugal now only issues
bonds in Euro in contrast with the period before 1992 where there were several issuances in
foreign currencies.
This study has shown that the Portuguese economy had a very positive performance throughout
the years following the adhesion to the EEC. In fact, the economic growth was positive in every
year until the signature of the Maastricht Treaty (that created the EMU in 1992) and the public
debt as a percentage of the GDP also remained stable during those years. Despite entering
into recession in 1993 (mainly due to the exchange rate crisis of 1992 and 1993), the behaviour
of the economic growth remained positive despite being slightly below the achievements of the
previous decade. Furthermore, the debt ratio, despite seeing an increase following the 1993
crisis, it quickly return to the levels seen during the 1980s where it was close to 50 per cent of
GDP.
One of the main findings to emerge from this dissertation is that the Portuguese economy had a
poor performance in terms of economic growth and government debt as a percentage of the
GDP in the period following the official creation of the Euro. In fact, during the single currency
period Portugal as not only seen a low economic growth but also three years of recession that
affected the good performance of the past decades and affected the convergence towards the

46
richest countries in Europe. Furthermore, the debt ratio has increased from 50 per cent in 1999
to 93.32 per cent in 2010, well above the 60 per cent target set by the European institutions.
These findings suggest that being on a monetary union has negatively affected the Portuguese
economy.
The relevance of the relationship between the debt ratio and economic growth was also a part
of the study. Using the Pearson’s correlation as the appropriate statistical measure, the
dissertation clearly shows that both variables have a negative relationship. This means that
when the country increases its debt ratio, the economic growth will decrease. Also, a
significance test was also presented in order to support the Pearson’s correlation calculation.
The findings of this study suggest that the adhesion to the Euro area have prejudice Portugal in
terms of its economic development. Being a small economy in a monetary union did not boost
the economic growth as was expected and the performance of the country was disappointing
throughout this period.

47
REFERENCES
Adam, C. S., & Beaven, D. L. (2005). Fiscal deficits and growth in developing countries. Journal
of Public Economics, Vol. (4) , pp. 571-597.
Aguiar-Conraria, L., Alexandre, F., & Pinho, M. C. (2010). O euro e o cresimento da economia
portuguesa: uma análise contradactual. NIPE Working Paper 37 , pp. 1-21.
Aizenman, J., Kletzer, K., & Pinto, B. (2007). Economic growth with constraints on tax revenues
and public debt: implications for fiscal policy and cross-country differences. NBER Working
Paper 12750 .
Alves, N., Correia, I., Gomes, S., & Sousa, J. (2009). Um olhar participante sobre a área do
euro: dinâmica, heterogeneidade e políticas. In B. d. Portugal, Economia Portuguesa no
Contexto da Integração Económica, Financeira e Monetária (pp. 1-65). Lisboa.
Amaral, L. (2010). Economia Portuguesa, As Últimas Décadas. Fundação Francisco Manuel
dos Santos.
Amor, J. M. (2001). Government bond markets in the Euro zone. Madrid: Wiley.
Aschauer, D. A. (2000). Do states optimize? Public capital and economic growth. The Annals of
Regional Science, 34(3) , pp. 343-363.
Bank, W. Managing Public Debt: From Diagnostics to Reform Implementation. World Bank
Publishing.
Begg, I., Hodson, D., & Maher, I. (January de 2003). Economic Policy Coordination in the
European Union. National Institute Economic Review , pp. No. 183, pp. 66-77.
Benigno, P. (2008). Optimal monetary policy in a currency area. Journal of International
Economics 63(2) , 293–320.
Blanchard, O. (2008). Macroeconomics: International Version. Pearson.
Bodie, Z., & Merton, R. (2000). Finance. New Jersey: Prentice-Hall.
Brandão, E. (2003). Finanças. Porto: Porto Editora.
Braz, C. R. (2008, August). Fiscal policy and pension expenditure in Portugal. IFC Bulletin No
28 , pp. 233-241.
Buchanan, J. (1958). Public Principles of the Public Debt. Illinois: Homewood.
Budd, A. (2005). Black Wednesday: A Re-examination of Britain's Experience in the Exchange
Rate Mechanism. Institute of Economic Affairs.

48
Carvalho, V. M. (2008). Modelo IS/KM: Economia Fechada ou Grande Economia Aberta.
Faculdade Economia Porto.
Claessens, S., Klingebiel, D., & Schmukler, S. (2003). Government Bonds in Domestic and
Foreign Currency: The Role of Macroeconomic and Institutional Factors. CEPR Discussion
Paper, No. 1125.
Cláudia Braz, M. M. (2009). Public finances in Portugal: trends and challenges. The Portuguese
Economy in the Context of Economic, Financial and Monetary Integration . Lisboa: Banco de
Portugal.
Clements, B., Bhattacharya, R., & Nguyen, T. Q. (2003). External debt, public investment, and
growth in low-income countries. IMF Working Papers 03/249 .
Cohen, D. (1993). Low Investment and Large LDC Debt in the 1980s. American Economic
Review, Vo. 83(3) , p. 437 439.
Comittee, E. a. (2000). Progress Report on EU Government Bond Instruments. Brusssels.
Constâncio, V. (2004). European monetary integration and the Portuguese case. Third ECB
Central Banking Conference. Frankfurt.
Copeland, L. (2008). Exchange Rates and International Finance. Pearson Education Limited.
Corsetti, G., & Pesenti, P. (2001). Welfare and macroeconomic interdependence. Quaterly
Journal of Economics 116 , 421-446.
Cristina Checherita, P. R. (2010). The impact of high and growing government debt on
economic growth: an empirical investigation for the euro area. ECB Working Paper No 1237 .
Cunha, A. (2012, Janeiro/Junho). O Tratado de Maastricht: A Europa e Portugal em. Debater a
Europa , pp. 24-40.
Damodaran, A. (n.d.). Damodaran Online. Retrieved February 27, 2011, from THE STABLE
GROWTH DDM: GORDON GROWTH MODEL:
http://pages.stern.nyu.edu/~adamodar/pdfiles/ddm.pdf
Devereux, M., & Engel, C. (2003). Monetary policy in the open economy economy revisited:
Exchange rate flexibility and price setting behavior. Review of Economic Studies 70(4) , 765-
783.
Duarte, M., & Obstfeld, M. (2008). Monetary policy in the open economy revisited: The case for
exchange-rate flexibility restored. Journal of International Money and Finance 27(6) , 949-957.
ECB. (2012). Obtido em 20132, de European Central Bank: www.ecb.europa.eu
ECB. (April de 2007). From Government debt Deficit to Debt: Bridging the Gap. ECB Monthly
Bulletin , pp. 87-93.

49
ECB. (2004). The Euro Bond Market Study. European Central Bank.
ECB. (2004). The Monetary Policy of the ECB. European Central Bank.
Eudey, G. (1998). Why is Europe Forming a Monetary Union. Department of Economics,
Georgetown University , pp. 13-21.
Exenberger, A. (2004, November). The Stability and Growth Pact: Experience and Lessons to
be Learnt for Europe and the World. Working Paper .
Fabozzi, F., & Mann, S. (2012). The Handbook of Fixed Income Securities (8th ed.). London:
McGraw-Hill Contemporary.
Falcetti, E., & Missale, A. (2002). Public Debt Indexation and Denomination with an Independent
Central Bank. European Economic Review , 46(10), pp. 1825-50.
Fatás, A., & Mihov, I. (2003). Fiscal Policy and EMU: Challenges of the Early Years. Edwar
Elgar Publishing.
Field, A. (2009). Discovering Statistics using SPSS. London: SAGE Publications Ltd.
Finanças, M. d. (1992). Portugal do Q1 ao P2: Estratégia sustentada de mudança do regime
económico. Lisboa.
Freitas, M. L. (2005, October). Portuga-EU convergence revisited: evidence for the period 1960-
2003. Nucleo de INvestigação em Politicas Economicas Universidade do Minho - Working
Paper Series .
Gagnon, J. E., & Hinterschweiger, M. (2011). The Global Outlook for Government Debt Over the
Next 25 Years (Policy Analyses in International Economics). Peterson Institute for International
Economics.
Gordon, R. (2003). Macroeconomics. London: Addison Wesley.
Grauwe, P. D. (2007). Economics of Monetary Union. Oxford University Press.
IGCP. (n.d.). Retrieved from www.igcp.pt
Krugman, P. (1988). Financing vs. forgiving a debt overhang: Some analytical issues. NBER
Working Paper No. 2486 .
Kumar, M., & Woo, J. (2010). Public Debt and Growth. IMF Working Paper 10/174 .
Lojsch, D. H., Rodríguez-Vives, M., & Slavik, M. (October de 2011). The size and composition
of government debt in the euro area. ECB Occasional Paper Series, no 132 .
Lopes, J. S. (2008). Introduction. Challenges Ahead for the Portuguse Economy . Lisboa:
Imprensa de Ciências Sociais .

50
Ludger Schuknecht, P. M. (2011, September). The Stability and Growth Pact: Crisis and
Reform. ECB Ocasional Paper Series , p. No 129.
Macedo, P. B. (1999, December). Portugal's European integration: the limits of external
pressure. Harvard Center of European Studies .
Maior, P. V. (2011). Portugal, the Debt Crisis and EMU Membership: A Lost Opportunity? 6th
European Consortium for Political Research General Conference. Reykjavik: University of
Iceland.
Meade, J. E. (1958). Is the National Debt a Burden? Oxford Economic Papers, New Series,
Vol.10(2) , pp. 163-183.
Miller, F. P., Vandome, A. F., & McBrewster, J. (2010). European sovereign debt crisis: Yield
Spread, Sovereign Debt, Credit Default Swaps, Deficit Spending and Government Debt.
Alphascript Publishing.
Miller, V. (1997). Political Instability and Debt Maturity. Economic Inquiry , 35(1), pp. 121-127.
Mink, R., & Rodriguez, M. (2004). The Measurement of Government Debt in the Economic and
Monetary Union. Sixth Banca d'Italia Workshop on Public Finance .
Modigliani, F. (1961). Long-Run Implications of Alternative Fiscal Policies and the Burden of the
National Debt. Economic Journal 71 (284) , pp. 730-755.
Pattillo, C., Poirson, H., & Ricci, L. (2002). External Debt and Growth. IMF Working Paper 02/69
.
Pimco. (2005, June). Bond Basics. www.pimco.com .
Porter, M. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors .
London: Free Press.
Portugal, B. d. (2012). Banco de Portugal. Retrieved June 6, 2012, from www.bportugal.pt
Reinhart, C. M., & Rogoff, K. S. (2009). Growth in a Time of Debt. NBER Working Paper no.
15639 .
Rosenbaum, J., & Pearl, J. (2009). Investment banking: valuation, leveraged buyouts, and
mergers & acquisitions. New Jersey: Wiley.
Roubini, N., Parisi-Capone, E., & Menegatti, C. (2007). Growth Differentials in the EMU: Facts
and Considerations. RGE Monitor.
Royo, S. (2005, August). The Challenges of EU Integration: Iberian Lessons for Eastern
Europe. Jean Monnet/Robert Schuman Paper Series , p. Vol. 5 No. 27.
Samuelson, P., & Nordhaus, W. (2009). Economics. McGraw-Hill Higher Eduction.

51
Santos, B. d. (2007). Parceria Público-Privadas e Justiça - Uma análise comparada de
diferentes experinências. Coimbra: Observatório permanente da justiça portuguesa - Centro de
estudos sociais Faculdade de Economia Coimbra.
Schclarek, A. (2004). Debt and Economic Growth in Developing Industrial Countries. mimeo .
Shapiro, A. (2010). Multinational Finantial Management. Asia: Wiley.
Silva, M. G. (2007). Bolsa - Investir e Ganhar mais. K Editora.
Wolswijk, G., & Haan, J. d. (2005, March). Government Debt Management in the Euro Area -
Recent Theoretical Developments and Changes in Practices. ECB Occasional Paper Series .

52
APPENDIX 1 - Government Debt Issues - Funded debt
(in a calendar year perspective)
EUR millions 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Treasury Bonds (OT) (1)
8,517.5 9,078.8 7,673.7 8,643.5 12,998.0 7,571.5 6,700.0 16,742.2 13,911.4 9,732.8 13,382.0 15,595.9 21,713.7
< 5 years 287.2 0.0 0.0 0.0 0.0 5,071.5 4,200.0 1,800.0 0.0 0.0 0.0 0.0 0.0
5 years 2,860.7 3,536.8 2,526.9 3,385.9 5,817.0 0.0 0.0 3,000.0 3,000.0 0.0 0.0 5,317.3 1,801.8
10 years 3,014.8 5,000.0 5,146.8 5,257.6 5,036.0 2,500.0 2,500.0 5,855.7 5,800.0 7,982.8 7,273.0 8,632.1 15,210.2
15 years 2,354.8 542.0 0.0 0.0 2,145.0 0.0 0.0 6,086.5 0.0 1,000.0 5,809.0 835.4 4,701.7
30 years 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5,111.4 750.0 300.0 811.2 0.0
Short-term (2)
1,874.0 833.9 877.2 3,559.3 1,712.2 5,719.2 13,266.4 14,435.6 13,977.6 15,352.7 18,598.4 22,901.5 25,723.0
Saving Certificates (3)
1,122.4 1,223.1 1,821.1 1,772.1 1,622.6 1,174.8 945.1 1,082.8 1,609.4 1,388.2 745.9 389.9 203.9
Treasury Certificates - - - - - - - - - - - - 684.7
Other (4)
315.9 1,240.0 0.0 0.0 193.9 0.0 0.0 0.0 0.0 0.0 0.0 735.5 2,802.7
Total debt 11,829.9 12,375.7 10,372.0 13,974.9 16,526.6 14,465.5 20,911.5 32,260.5 29,498.5 26,473.7 32,726.4 39,622.8 51,128.0
(1)
At nominal value and according to the original maturity of the respective Tbond. Includes EURO-OT in 1998.
(2)
Includes Treasury bills, ECP, Repos, CEDIC, and money market credit loans.
(3)
Excludes accrued interest.
(4)
Excludes Promissory Notes.
Source: IGCP

53
APPENDIX 2 – Exchange rate
Currency
Number
of
issuances
Amount local
currency
Amount Euros Spot rate
Debt as a percentage of
total
Australian Dollar 1 250,000,000 200,900,032 1.2444 0.00
British Pound Sterling 3 310,000,000 384,162,588 0.80695 0.01
Deutsche Mark 12 5,427,500,000 2,775,036,685 1.9558 0.07
French Franc 2 2,219,000,000 338,284,369 6.5596 0.01
Italian Lira 1 50,000,000,000 25,822,845 1936.2700 0.00
Japanese Yen 14 306,200,000,000 3,017,938,104 101.4600 0.07
Netherlands Guilder 3 250,000,000 113,445,054 2.2037 0.00
Portuguese Escudo 71 5,088,724,390,152 25,382,450,246 200.4820 0.60
Spanish Peseta 6 12,000,000,000 72,121,453 166.3860 0.00
Swiss Franc 1 100,000,000 83,263,947 1.2010 0.00
US Dollar 7 12,165,000,000 9,601,420,679 1.2670 0.23
Total 121 41,994,846,000
Source: European Central Bank, as of 20/06/2012

54
APPENDIX 3 – Co variation calculation
Year GDP growth (annual %) Gross Debt as % of GDP
1986 4.14 50.22
1987 6.38 56.47
1988 7.49 55.83
1989 6.44 54.67
1990 3.95 53.32
1991 4.37 55.69
1992 1.09 50.02
1993 -2.04 54.63
1994 0.96 57.33
1995 4.28 59.22
1996 3.69 58.29
1997 4.41 54.43
1998 5.14 50.40
1999 4.07 49.55
2000 3.92 48.48
2001 1.97 51.20
2002 0.76 53.84
2003 -0.91 55.88
2004 1.56 57.65
2005 0.78 62.75
2006 1.45 63.92
2007 2.37 68.27
2008 -0.01 71.58
2009 -2.91 83.01
2010 1.38 93.32
Average 2.59 58.80
Covar -11.41222602
Var 6.871827768 112.0154253
Var Square Root 27.74438159
Correlation
coefficient -0.411334669

Dissertation

More Related Content

What's hot

Similar to Dissertation

Dissertation