Portugal's fiscal woes attract attention of EC bean counters
THE European Commission's gaze moved westwards and northwards yesterday as officials in Brussels turned their attention from Greece to Portugal -- warning the government in Lisbon that it may need to cut spending to meet deficit targets.
"The Portuguese stability programme is ambitious and quite concrete for the years 2011 to 2013, but additional measures of fiscal consolidation might be needed, especially for this year," EU Economic and Monetary Affairs Commissioner Olli Rehn said yesterday.
Concern that Greece's fiscal woes could spread to other indebted euro-area countries has been pushing up the cost of borrowing for Portugal and of insuring its debt.
The country had a budget deficit of 9.4pc of gross domestic product (GDP) last year, more than three times the EU limit of 3pc.
Ireland, which had an even higher deficit, was ordered by the commission last month to explain in greater detail how it will cut its deficit in the years to come.
Portugal successfully sold €2bn of two- and 10-year bonds yesterday but investors priced in higher risk for the longer-dated issue and spreads rose in the secondary market following other peripheral eurozone countries. The premium, or spread, investors demand to hold Portuguese 10-year bonds instead of benchmark German bunds rose seven basis points to 127 basis points yesterday, according to Bloomberg generic prices.
That still left Portuguese bonds cheaper than Greek or Irish bonds.
A surge in Greek borrowing costs to an 11-year high last week led euro-region finance ministers to pledge €30bn in loans at below-market interest rates to help aid Greece. Portugal itself may need "pre-emptive" aid from euro-region governments, former International Monetary Fund chief economist Simon Johnson said on Monday.
Last month, Fitch Ratings lowered Portugal's credit rating by one step to AA- with a "negative" outlook, saying that further economic or fiscal underperformance this year or in 2011 may lead to another downgrade.
Portugal expects the economy to expand 0.4pc this year, less than the 0.7pc forecast by the central bank in January and by the government in March.
That expansion would follow a 2.7pc contraction in GDP last year.
The government this week reaffirmed its commitment to reach the goals set out in its Stability and Growth Programme for the 2010 to 2013 period.
It calls for narrowing the deficit to 2.8pc in 2013 by delaying investment on railway projects, limiting state workers' salary increases and curbing some tax deductions.
The programme's macroeconomic scenario is prudent "but obviously not free of risks", the finance ministry said.
Prime Minister Jose Socrates's government has said that it plans to sell €6bn of assets that may include stakes in energy utility EDP-Energias de Portugal and oil company Galp Energia SGPS.