The Portuguese sovereign debt from 1500 to 1796

Portugal’s 2009-2011 woes with sovereign debt draw considerable attention to its long and eventful credit history. The commentators saw Portugal as a serial defaulter crippled by mismanagement, deficits and ballooning debt since the Age of Discoveries. In Reinhart and Rogoff’s iconic phrase this time was no different.

However, looking back to pre-1800 public debt reaches very different conclusions. This study, of the original sources, builds long-run series on variables like the emissions of the main debt instrument (“juros”), interest rates, debt stocks, debt-to-GDP and debt-to-revenue ratios.

This research shows that the recent events are indeed different. From 1500 to 1796, Portugal built a reputable sovereign debt system with low interest rates and few disturbances. Backed by reliable collateral, the interest rates on the juros declined from 7.14% in 1500 to 3.5% in 1770, on pair with Europe’s most advanced public debt instruments. Debt stocks remained modest, never exceeding 11% of GDP, with debt service absorbing no more than one-fifth of state revenues. This contrasts sharply with England and Holland, whose debt-to-revenue ratios surpassed 100% and even 200% in the eighteenth century.

This cautious strategy reflected constitutional limits on taxation and a preference for long-term borrowing with strong collateral. This caution, nevertheless, had an important drawback: the juros were increasingly concentrated in mortmain institutions such as the Church and charitable brotherhoods. At such, they were hoarded rather than traded and, unlike what happened in England, Netherlands of Spain, public debt did not contribute to create a liquid capital market. Instead, the sovereign increasingly controlled the resources of those institutions to park juros at progressively lower interest rates. This financial repression protected the credibility of the sovereign debt and allowed for low interest rates but limited market liquidity.

Until 1800, Portugal’s sovereign debt, even if at the cost of illiquidity, was credible. It was only in the Liberal period that the country began to acquire its reputation as a serial-defaulter.

Click here to go to the paper by Leonor Freire Costa and António Castro Henriques.