Private Debt Is the Problem in Portugal

This article is about Portugal but it applies to other countries as well. It argues that Portugal has been consuming beyond its means by relying upon private debt to fund consumption. Investors are concerned that this will create problems for Spanish and domestic banks that have done the lending. They assume that public debt will rise to assist the banks who face defaults. It concludes by arguing that it is the total of public and private debt that we should be concerned about. It is misleading to focus only on public debt. One of the problems with this argument is that consumption must be reduced in Portugal by 10%. That will cause the economy and tax revenues to shrink. This will exacerbate the debt to GDP ratio and it will also lead to problems of social unrest and political problems for government.