January 20, 2022

Far-Off Region Piles More Debt on Portugal

But while he has managed over the past three decades to turn the islands from a poverty-stricken outpost in the North Atlantic into one of the country’s wealthiest regions, progress has come at a high price — one that is only now becoming clear.

Last month, the Portuguese Finance Ministry ordered an investigation of Madeira’s accounts after unearthing what it called “a grave irregularity” — €1.1 billion, or $1.5 billion, of debt that had been accumulated since 2008 but not accounted for.

The discovery of yet more debt — equal to 0.3 percent of Portugal’s gross domestic product — complicates life for the national government as it struggles to meet financial targets agreed to last May with international creditors in return for a €78 billion bailout.

Furthermore, the debt scandal provides investors with alarming evidence that governments in Portugal and other ailing euro economies are still struggling simply to calculate the extent of the damage to public finances from wayward regional governments and other local forces that are hard to control.

Similar problems have surfaced in Greece as well as in Spanish regions like Castilla-La Mancha, where a recently elected government accused its predecessor of understating its deficit and not accounting for €2 billion of unpaid bills to service providers.

“Madeira has become a major embarrassment for Portugal, and I believe that more undisclosed debt will come out,” said Michael Blandy, chairman of Blandy Group, one of Madeira’s largest companies, whose assets range from wines to hotels and also include a newspaper that has been critical of Mr. Jardim.

Indeed, Madeira’s debt estimates continue to creep up. On Friday, Vítor Gaspar, the Portuguese finance minister, announced that Madeira’s debt had reached €6.3 billion by the end of the first half, contradicting a recent figure of €5.8 billion from the local authorities.

International creditors have expressed dismay at such disclosures. Olli Rehn, the European commissioner for monetary affairs, called Madeira’s unaccounted-for debt “less-than-a-welcome surprise.” Moody’s, the credit rating agency, recently downgraded Madeira’s long-term debt to B3 from B1 because of “bad governance and management and poor budget performance.”

With Madeira’s election nearing, opposition politicians like Maximiano Martins, the Socialist Party leader here, claim Madeira is on the brink of default. Mr Martins, an economist by training, provided his own, even higher estimate of Madeira’s debt — €7.3 billion — with additional liabilities in the form of guarantees given to help local government-controlled companies issue more debt.

In addition, he said the government was about 1,000 days behind in paying some health service providers.

Mr. Jardim, a Social Democrat, has accused his opponents of overstating Madeira’s budgetary problems ahead of the election to knock him from power. He told supporters last week that while his government needed to plug a financial “hole,” the challenge could not be compared to the “crater” that the national government was confronting.

Lisbon has not accused Mr. Jardim or any other official of corruption. In an attempt to reassure creditors, Mr. Gaspar, the finance minister, called Madeira “an isolated case” of accounting malpractice. Still, the government in Lisbon is preparing a financial rescue for Madeira, due to be revealed after the election Sunday.

But critics claim that Mr. Jardim and his associates failed to rein in spending partly because, after 33 years in power, the division has been completely blurred between political and business interests in Madeira.

“The politicians pass laws in our Parliament in the morning and then do business among themselves in the afternoon,” Mr. Blandy charged.

Mr. Jardim’s popularity grew along with Madeira’s economy, as he used its status as an autonomous region to tap into extensive subsidies from Lisbon and the European Union.

Until Portugal’s return to democracy, Madeira lagged far behind the Portuguese mainland, with an economic output per person that was 40 percent of the national average, and an infant mortality rate of 36 percent.

“Some people lived in caves here,” said João Machado, Madeira’s regional tax director.

By 2008, however, Madeira’s 250,000 residents lived in Portugal’s second-wealthiest region, after Lisbon, according to the National Statistics Institute.

Article source: http://www.nytimes.com/2011/10/04/business/global/far-off-region-piles-more-debt-on-portugal.html?partner=rss&emc=rss

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