S&P says Portugal default is unlikely even as economy dips
Published 05/10/2010 | 05:00
Portugal is unlikely to default on its debt even as the economy fails to grow over the next two years, Standard & Poor's said yesterday.
"The likelihood of default on Portuguese debt remains extremely low," S&P analysts led by Frank Gill said in a statement.
"We expect that this government would take further appropriate fiscal consolidation measures to improve its balance sheet should it believe such measures necessary."
The ratings company said the key risk to "stabilising" the country's debt ratio remains the economic outlook. It sees the economy shrinking 1.8pc next year and stagnating in 2012 as prime minister Jose Socrates cuts public-workers' wages, raises some taxes and freezes investment this year.
The budget measures announced by the government last week represent a "critical step" to reducing debt, S&P said.
The announcement helped lower the yield spread between Portugal's 10-year debt and that of Germany, Europe's benchmark.
The spread was at 383 basis points yesterday, down from a record 441 basis points on September 28.
Mr Socrates leads a minority government and to secure passage of the budget he's tried to court support from the opposition Social Democrats, who have threatened to oppose a budget that contained new tax increases.
"Our expectation is that despite the opposition's well- known aversion to tax hikes, the Socrates minority government's budgetary proposals will be included in the 2011 budget, which we expect to be passed through parliament," S&P said.
The spending cuts next year will have an impact equivalent to 2pc of gross domestic product, while measures on tax revenue will represent about 1pc of GDP, according to the government.
"Net exports will be the only contributor to GDP growth over the next two years," S&P said.
Portugal's budget gap was 9.3pc of GDP in 2009, the highest in the 16-country euro region after Ireland, Greece and Spain. The government aims to narrow the shortfall to 7.3pc this year, 4.6pc next year, and intends to meet the EU limit of 3pc in 2012.