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Portugal reaches deficit target

The financial crisis engulfing Portugal showed no signs of abating as its borrowing costs surged again, even though it lowered its budget deficit to the targeted 7.3pc of gross domestic product last year.

Portugal is scrambling to correct its fiscal policies amid market fears that it will not be able to meet its debt obligations and will need a bail-out like Greece and Ireland.

The country's high debt load and economic frailty have made investors reluctant to lend money unless they are given a high return for their risk. But markets are also worried that Portugal may not be able to afford the high cost of its loans amid a predicted downturn stemming from a debt-reducing austerity programme.

Market nervousness about Portugal showed up again on Thursday when the yield on Portuguese 10-year bonds rose to 7pc - matching a euro-era record reached last November - before falling back slightly. By comparison, benchmark German bonds were steady at 2.9pc.

The yield rise did not prevent the government debt agency from announcing an auction of three and nine-year bonds next Wednesday. It said on its website it intended to raise at least €750m and as much as €1.25bn.

Portugal raised €500m in a Treasury bill sale on Wednesday but had to accept a steep increase in interest rates to entice investors who are demanding a higher premium to risk their money on more indebted countries.

The average interest rate of 3.7pc was close to twice the 2pc rate Portugal paid on similar bonds in September and was way up from the 0.6pc it paid a year ago.

The government has repeatedly ruled out a bail-out, saying it does not need help to contain the debt crisis and restore economic health.

Secretary of state for the national budget Emanuel Augusto Santos said Portugal met its deficit target of 7.3pc last year. Portugal's deficit in 209 was 9.3pc - the fourth-highest in the eurozone. The government is aiming for a deficit of 4.6pc this year.

A key factor in last year's deficit reduction was Portugal Telecom's transfer of its €2.8bn pension fund - equivalent to around 1.6pc of GDP - to the state treasury.

PA Media