Business Day

Lisbon going places but cannot rest yet

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If there’s a symbol of the breadth of the eurozone’s recovery, it is Portugal. In 2011 it had to accept an internatio­nal bail-out on punishing terms. Today, three years after graduating from that programme, growth and confidence have returned. As if to mark the achievemen­t, S&P Global Ratings just raised Portugal’s sovereign rating to investment grade.

This success is real, but making it last will require more work. The banking system is struggling under the weight of nonperform­ing loans, which squeezes credit for good borrowers. The government is cutting capital projects to increase its day-to-day spending. These and other issues will have to be addressed for Portugal to turn a cyclical upswing into faster long-term growth.

Portugal has been investing too little for years, and for the past two decades the problem has been getting worse, not better. In turn, lack of investment has held back innovation. One remedy would be for Portuguese banks to support the growth of dynamic new companies. Yet Portuguese banks are still preoccupie­d with the bad loans of the past. The government has made a start on this, but should do more to encourage orderly bankruptci­es, restructur­ings and write-offs.

The government also needs to invest more in infrastruc­ture. With public debt at roughly 130% of national income, Lisbon has little freedom of manoeuvre: More capital spending will require tighter control of other outlays.

Unfortunat­ely, Prime Minister António Costa and his government have done the opposite. Some public-sector workers, for instance, have been given pay rises even though their incomes are higher than in the private sector. Meanwhile, in 2016 infrastruc­ture spending fell to its lowest level in more than 20 years.

Further progress demands more investment, stronger banks and the right kind of fiscal discipline. New York, September 22.

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