Portuguese Budget Deficit Widens 5 Percent as Borrowing Costs Hit Record
By Emma Ross-Thomas and Joao Lima - Sep 21, 2010 12:00 AM GMT+0200 Mon Sep 20 22:00:01 GMT 2010
Portugal’s budget deficit widened in the first eight months of the year, indicating the government may struggle to rein in the euro-region’s fourth-largest deficit as its borrowing costs surged to a record.
The central government’s deficit rose to 9.19 billion euros ($12 billion) from 8.74 billion euros a year earlier, the Finance
Ministry said late yesterday. Tax revenue rose 3.3 percent, more than budgeted, and spending increased 2.7 percent, in line with budget estimates, the ministry said.
Portugal’s
borrowing costs rose to a euro-era record yesterday, on concerns over the government’s ability to rein in the region’s fourth-largest budget deficit while avoiding a return to recession. The extra yield investors demand to hold Portuguese debt rather than German equivalents was reached 398 basis points yesterday, around the level Greek bonds were trading at in April when the European Union offered the country emergency loans to avoid default.
“Fiscal consolidation is tentative at best,”
Guillaume Menuet, senior European economist at Bank of America Merrill Lynch, said before the latest data. “It’s going to be a very close call” whether the government reaches the targets or not.
The government aims to narrow its overall deficit to 7.3 percent of gross domestic product in 2010 from last year’s 9.3 percent, the region’s largest after Ireland, Greece, and Spain. The government has pledged to reach the target, with Finance Minister Fernando Teixeira dos Santos saying Sept. 9 that the country “can’t afford” not to. It intends to reach the EU limit of 3 percent in 2012.
Tax Increases
Portugal’s minority Socialist government, lead by Prime Minister Jose Socrates, has pledged to reduce hiring of public workers, while raising taxes and postponing public infrastructure
spending. Still, the results of its efforts are “a bit disappointing,” said Emilie Gay, an economist at Capital Economics in London.
Michael Meister, a senior member of German Chancellor Angela Merkel’s party, added to pressure on the government on Sept. 14, saying Portugal must step up its efforts to overhaul its economy.
By contrast, Spain slashed its seven-month central government deficit in half from a year earlier, and the yield on its 10-year
debt fell to 4.23 percent yesterday from 4.88 percent on June 16.
Portugal has already funded around 90 percent of its financing needs for this year, Teixeira dos Santos said on Sept. 10, and the country doesn’t face a bond redemption until April 2011.
No ‘Rescue’
There’s “no need to knock on the door of any kind of special rescue program,” the minister said in an interview with Bloomberg Television in Hong Kong. Klaus Regling, the head of the bailout fund known as the European Financial Stability Facility, said today he doesn’t expect any country will need to tap the fund. Portugal’s Treasury plans to sell four-year and 10-year bonds tomorrow.
The
extra yield investors demand to hold Portuguese 10-year debt rather than German equivalents compares with a
risk premium of 398 basis points on Greek debt on April 11 when the euro region agreed to offer that country emergency loans to avoid default. The EU followed the Greek loan with the creation of a 750 billion-euro backstop for high-deficit nations, which has yet to be used.
With the yield on
Portuguese 10-year bonds at 6.39 percent, the most since the start of the euro currency, Portugal may also risk tipping the economy back into recession as the government’s contribution to GDP shrinks. Portugal has barely grown for a decade, with the expansion averaging less than 1 percent annually since 2000.
Growth to Slow
“With low growth and this level of interest rates, eventually you have a problem with the debt and that’s what markets are nervous about,” said
Luigi Speranza, an economist at BNP Paribas in London, who expects a return to recession in the second half. Low growth “also makes life for the government a bit more difficult, the commitment to fiscal consolidation can vanish,” he said.
The
economy grew 1.1 percent in the first quarter from the previous three months and 0.3 percent from April to June. Still, second-quarter GDP was propped up by government spending, which grew 3.9 percent, according to data from the National Statistics Institute. The Bank of Portugal in July predicted annual growth will slow to 0.2 percent in 2011 from 0.9 percent this year.
(Bloomberg)
