Post published in the Innovation Models Blog following the interview of Hugo Mendes Domingos in ETV's (Portuguese Economic TV) Closing Bell in October 2 2012 about the current increase in company insolvencies in Portugal.

1. Portuguese companies have suffered a downturn in their financial stability ever since start of the
crisis in 2008. Company insolvencies have now reached a number of around 15.000 since the
beginning of 2012, which accounts for 50 new insolvencies per day, as reported in
newspaper Público. Looking at the historic company insolvencies in Portugal below, 2008 was
the most dramatic period with 41.245 insolvencies. This statistic (total insolvencies) is not
directly comparable with the 50 insolvencies per day figure for a number of reasons. It is likely
that the total number of insolvencies in 2012 will show an increase on the previous year.
Source: PorData
Consultants Euler-Hermes expect a 50% increase in insolvencies in Portugal this year, as shown
below. This is well above other European countries, including Spain and Greece.

2. Source: Euler-Hermes
According to the report by Euler-Hermes, in Portugal "there is a time gap between the economic
policy decision and its impact on the real economy. The industrial fabric is in danger and
rebuilding it will take some time".
This recent wave of company insolvencies is but a symptom of the adverse financial conditions
that most Portuguese companies are facing. Between the Government's austerity measures and
the slowdown in Spain, one of the country's major trading partners, companies are facing major
headwinds.
In our view, the answer is to invest in innovative projects. Companies facing financial difficulties
are less likely to take on new projects however we believe that this is exactly what the economy
needs. Below is a chart of the percentage of GDP invested in R&D for Portugal and other
European countries. Germany is an example of economic development. In Germany, R&D spend
represents almost 3% of GDP. While Portugal has increased its share from 0.7% in 2005 to 1.6%
in 2010 and is well above countries such as Greece or Spain, that trend is reversing. R&D spend
is just a proxy for innovation however, a reduction of R&D spend does not bode well for a future
economic recovery.
Reactions to withdrawal of the proposed changes in social security contributions
We think it is relevant to do a quick analysis on the aftermath of the initial announcement of
proposed changes to social security contributions and the corresponding investors' reactions.
The Portuguese government bond yields (10 year maturity) reacted negatively to the
announcement and subsequent withdrawal of proposed changes to social security contributions.
Yields have been increasing almost continuously since 7 September, the date of the initial
announcement of the proposed changes by the Prime Minister.
The yields in 10-year Government bonds react to a number of factors, aside from internal policy
developments. Investors may be reacting to events taking place in Spain. However, investors

3. have almost certainly detected that the current Government has lost momentum as it
announced proposed changes to the social security contributions and then had to pull back in
haste following a widespread negative reaction to the proposal.
Portuguese Government Bond Yield (10 Y)
Source: Bloomberg as at 1 October 2012
These themes were discussed in ETV’s “Closing Bell” programme on 2 October (in Portuguese):
Youtube link - http://www.youtube.com/watch?v=LX3Oc8rwHEo
Related articles
• Portugal Tolerance for Higher Taxes Reaching Limit: Euro Credit -
Bloomberg (bloomberg.com)
• An Own Goal in Portugal (american.com)
• Portugal unveils new austerity measures (news.com.au)