Portugal Exiting Without a Net

19/05/2014 12:46 BST | Updated 16/07/2014 10:59 BST

Many corners have been turned since the dark days of the European debt crisis. Just over four years ago, it seemed that the countries in Europe that now make up the periphery were only a brief market session away from total collapse. Greece was the figurehead of these pressures with riots in Syntagma Square, tear gas and the very real threat of a break-up of the single currency area.

Those fears have now passed, as the wider Eurozone has switched from the acute sovereign debt panic to one of a chronic growth crisis and encouraging news occasionally pokes through the cracks. Today's news that Portugal will exit its bailout program is not cause for celebration, but marks how far the country has come.

Portugal has around EUR214bn of debt; the third largest as a percentage of GDP behind Greece and Ireland. Its economy has contracted by around 3% from its pre-crisis highs and Q1's figures for this year have suggested that the shrinkage will continue. This week saw the Portuguese statistics agency show growth shrinking by 0.7% in the first 3 months of this year with exports the major laggard; a property of a very strong euro.

Much like Ireland decided to do, Portugal will be leaving the clutches of the EUR78bn joint EU/ECB/IMF bailout without the safety net of a precautionary credit line. "We have financial reserves for a year that will protect us from any external turbulence," Prime Minister Pedro Passos Ceolho told reporters when making the decision.

In March, the OECD almost insisted that the Portuguese take a credit line, calling it "an important financial instrument" and highlighting the issues that the state may have in paying back over EUR42bn of debt between now and 2017.

Not accepting an ERM line of credit means Portugal will not be eligible for the ECB's emergency bond-buying plan - known as outright monetary transactions - although it would still benefit from any additional asset purchase plans the European Central Bank may be currently cooking up.

Political issues in the core of the Eurozone will have helped Portugal make its mind up as well. Last year's German elections were dominated by arguments about paying money to peripheral nations; concerns over moral hazard remain in the Netherlands, Austria and Finland too.

Portuguese borrowing costs are currently at their lowest levels since 2002 and a recent auction saw the country sell 750 million euros in 10-year bonds at an average yield of 3.58 percent in its first auction since April 2011.

We have to doubt how good these investments are at current yields but then again, anyone can play Harry Hindsight. We are not the only ones who will wish we were picking up Portuguese paper when the yields were above 18%.

Austerity has started to reap some rewards, although the human and social cost has been extreme and will remain so for at least another generation. Portugal managed its first trade balance since the Second World War in March of this year with exports set to hit close to 50% of GDP later in this decade. The Portuguese government must be incandescent with EURUSD still close to the 1.40 level.

Whether this "clean" exit from the bailout is a step too far will remain to be seen, it is of course a step in the right direction.