Tags: S&P | Portugal | Default | Unlikely

S&P: Portugal Default Is Unlikely Even as Economy Struggles

Monday, 04 Oct 2010 02:25 PM

Portugal is unlikely to default on its debt even as the economy fails to grow over the next two years, Standard & Poor’s said.

“The likelihood of default on Portuguese debt remains extremely low,” S&P analysts led by Frank Gill said in a statement today. “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 “stabilizing” the country’s debt ratio remains the economic outlook. It sees the economy shrinking 1.8 percent 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 today, down from a record 441 basis points on Sept. 28.

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 2 percent of gross domestic product, while measures on tax revenue will represent about 1 percent 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 9.3 percent 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 7.3 percent this year, 4.6 percent next year, and intends to meet the EU limit of 3 percent in 2012.

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Portugal is unlikely to default on its debt even as the economy fails to grow over the next two years, Standard Poor s said. The likelihood of default on Portuguese debt remains extremely low, S P analysts led by Frank Gill said in a statement today. We expect that this...
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2010-25-04
 

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