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Portugal’s banking and financial crises: unexpected consequences of monetary integration?

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  • Tiago Cardao-Pito
  • Diogo Baptista

Abstract

Portugal’s current financial crisis might be related to a banking crisis resulting from joining the Euro. The new-currency eliminated the exchange rate risk, but not the credit or liquidity risks within the Euroarea. However, Portuguese banks acted as if all of these risks had disappeared. They began pumping money in Portugal, by borrowing intensively in Euros abroad at low interest rates. The ensuing liquidity generated a capital-flow bonanza boom that culminated in a bust phase. Private and sovereign debt dramatically increased, which further soared when the government rescued banks. Portugal was then compelled to take extreme measures to address extraordinary debt-levels.

Suggested Citation

  • Tiago Cardao-Pito & Diogo Baptista, 2017. "Portugal’s banking and financial crises: unexpected consequences of monetary integration?," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 20(2), pages 165-191, April.
    • Handle: RePEc:taf:jecprf:v:20:y:2017:i:2:p:165-191
    DOI: 10.1080/17487870.2016.1181551
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