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Discipline not enough for Lisbon
By Peter Wise in Lisbon
The Portuguese government was sent a fresh reminder on Monday that painful austerity and tough economic reforms were insufficient to win back investor confidence, as bond yields hit record highs.
Concern that an impending Greek debt agreement could serve as a template for a renegotiation of Portuguese debt is hampering attempts by Lisbon to decouple from Athens by delivering reforms and cutbacks in return for its €78bn rescue package.
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Lisbon will not need to ask “for more time or more money”, insists Pedro Passos Coelho, prime minister.
Yet many economists acknowledge the need for both. António Saraiva, head of the Confederation of Portuguese Industry, says he is hopeful that Lisbon can borrow an extra €30bn from the European Union and International Monetary Fund.
The government believes it has delivered its part of the bargain by implementing its rescue agreement, receiving positive notes in two quarterly assessments by the so-called troika – the European Commission, IMF and European Central Bank.
A labour pact involving harsh cutbacks in holidays, overtime pay and dismissal compensation has been agreed with one of the two trade union federations, reflecting a relatively low level of social tension over the bail-out.
Privatisations are also on track, including the sale of 21 per cent of Energias de Portugal, the dominant power utility, to China’s Three Gorges Corporation, in a deal worth up to €8bn in investment and credit.
An internal €1.5bn financial rescue agreement was signed on Friday for Madeira, whose unreported spending upset Lisbon’s fiscal planning last year. A tough austerity plan for the island involves tax increases of 20-37.5 per cent.
Vítor Gaspar, finance minister, has guaranteed that the 2011 budget deficit will be close to 4 per cent of gross domestic product – compared with about 6.8 per cent in Greece, and significantly below the target of 5.9 per cent agreed with the troika – although this was largely achieved by one-off measures.
As a result, public debt will reach 112 per cent of GDP this year, compared with 190 per cent in Greece, according to the IMF.
“Portugal is in a considerably better fiscal position than Greece,” says Mr Antonio Garcia Pascual, chief southern European economist with Barclays Capital.
But a feeble outlook for growth and high external indebtedness have made it difficult for Lisbon, particularly since Standard & Poor’s joined Fitch and Moody’s in downgrading Portuguese debt to junk two weeks ago.
The economy is expected to contract more than 3 per cent in 2012 – Portugal’s third year of recession in four years – and official forecasts of a recovery in 2013 are increasingly seen as implausible.
“The fiscal consolidation ahead is nonetheless daunting. Nearly 2 percentage points of GDP in 2011 were due to a one-off bank pension transfer, requiring additional fiscal measures in 2012,” says Mr Garcia Pascual.
“It is becoming quite clear that many investors have lost confidence in Portugal’s ability to return to sustainable economic growth under its current constraints,” says a London-based analyst.
Economists see little realistic prospect of Portugal returning to the long-term debt market next year – as envisaged under its bail-out agreement – in time to meet a €9bn debt repayment that falls due in September 2013.
“There is a clear funding gap, and it’s justifiable from an economic point of view to doubt that Portugal will be able to access the markets next year,” says Luigi Speranza, economist with BNP Paribas.
Mr Passos Coelho’s hope is that European leaders will seek to prevent wider contagion by agreeing to provide Lisbon with more money and time to pay – without involving private bondholders.
“A clear understanding has been given that Greece is a unique and exceptional case,” says Mr Speranza. Breaking this principle by asking the private sector to participate in rescheduling Portuguese debt “would fuel the fear of even further contagion”.
In political terms, Mr Passos Coelho has succeeded in aligning Portugal more closely with Ireland than Greece as a country strongly committed to implementing tough austerity measures and meeting fiscal targets.
But deep-seated structural weaknesses continue to hold back growth and weigh heavily on market assessments of Portugal, particularly as investors grow increasingly concerned about the impact of austerity on growth.
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