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Portugal Slips Behind Spain, Ireland on Deficit

Monday, 20 Sep 2010 02:26 PM

(Updates with minister’s quotes in fifth, last paragraphs.)

Sept. 16 (Bloomberg) -- Portugal may be slipping behind Spain and Ireland in the dash to cut budget deficits, and credit conditions in the economy are the tightest since the height of the global financial crisis in 2008, JPMorgan Chase & Co. said.

“Spain and Ireland look to be tracking their fiscal objectives for the year,” said David Mackie, chief European economist at JPMorgan, in an e-mailed note. While Greece has shown “some slippage,” in Portugal “the situation looks more worrisome, with the lack of budgetary progress reflecting faster expenditure growth than would be consistent with the fiscal objective.”

Portugal, Spain and Ireland are trying to convince investors they can avoid the fate of Greece, which was forced to ask for a European Union-led bailout this year after its budget deficit spiraled out of control. Michael Meister, a senior member of German Chancellor Angela Merkel’s party, said Sept. 14 that Portugal must step up its efforts to overhaul its economy.

“We need to signal to markets: don’t worry, we’re tackling our structural problems, and more input from Portugal would be desirable,” Meister said in an interview.

Government minister Pedro Silva Pereira today reiterated Portugal’s pledge to achieve its budget goals this year. “We are able to honor our commitments,” he told a press conference in Lisbon after the weekly Cabinet meeting.

Bond Spreads

The extra yield that investors demand to hold Portuguese 10-year bonds over German counterparts jumped to a euro-era high of 372 basis points on Sept. 8 and was at 348 basis points today. The Irish spread is at 353 points, the Spanish spread is at 173 points and Greece’s spread is 906 points.

Portuguese government spending, excluding interest payments, rose 5.7 percent in the first seven months of the year, while total income increased 3.6 percent, the Finance Ministry said last month.

Portugal posted a deficit of 9.3 percent of gross domestic product in 2009, the fourth-highest in the 16-country euro region. The government aims to narrow the deficit to 7.3 percent this year and intends to meet the EU’s 3 percent limit in 2012.

Some euro-region economies may be threatened by more restrictive lending practices as financial institutions’ reliance on European Central Bank funding shortens the time horizon of the loans they are prepared to make, Mackie said.

Lending Standards

“It seems likely that increased recourse to the central bank, driven by funding stress, will lead to a tightening of lending standards, as the liability side of the banking sector’s balance sheet shortens in maturity,” Mackie said.

Credit conditions in Portugal are the tightest in two years, Mackie said. In Ireland, they could worsen if its banks “significantly” increased ECB borrowing, he said. In Spain, tightening has been “very modest.”

Two of the top five Portuguese banks surveyed by the country’s central bank in July said conditions for corporate lending had become “considerably” more demanding in the second quarter. Three said they were “slightly” more demanding.

Portugal’s borrowing costs increased at an auction of 750 million euros ($981 million) of 12-month bills yesterday. Borrowing costs had also increased at a Sept. 8 auction of 661 million euros of bonds due in 2013 and 378 million euros of bonds due in 2021.

Portugal has met 90 percent of its financing needs, Silva Pereira reiterated today.

---Editors: John Fraher, Jeffrey Donovan

To contact the reporter on this story: Anabela Reis in Lisbon at areis1@bloomberg.net.

To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net

© Copyright 2017 Bloomberg News. All rights reserved.

   
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(Updates with minister’s quotes in fifth, last paragraphs.) Sept. 16 (Bloomberg) -- Portugal may be slipping behind Spain and Ireland in the dash to cut budget deficits, and credit conditions in the economy are the tightest since the height of the global financial crisis in...
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2010-26-20
Monday, 20 Sep 2010 02:26 PM
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