Portugal to choose new govt as debt woes worsen

AP News
Posted: Mar 31, 2011 8:06 PM
Portugal to choose new govt as debt woes worsen

Portugal's financial plight deepened Thursday when official figures showed the debt-stressed country's budget deficit last year was 8.6 percent of gross domestic product _ way above the government target of 7.3 percent that was intended to allay market fears.

The estimate by the National Statistics Institute was another setback for Portugal's struggle to avoid taking a bailout, like those Greece and Ireland accepted last year, as it faces two months without a government before a June 5 general election and debt repayments it can't afford.

The deficit figure is far above the eurozone's limit of 3 percent, though the statistics institute noted its measurements were based on new EU accounting rules which include the cost of helping banks and state companies.

Outgoing finance minister Fernando Teixeira dos Santos said that without the accounting changes the deficit last year would have been 6.8 percent, showing that his austerity measures are paying off.

He also complained about the accounting alterations, saying it was "like changing the score after the game has ended."

Though Portugal's economy represents less than 2 percent of the eurozone's GDP, its troubles could wreck European efforts to shake off a debt crisis that has dogged the continent for more than a year. European leaders had hoped that the rescue of Greece and Ireland would ease investor concerns and spare banks across the continent that are exposed to eurozone debt.

But Portugal's political uncertainty and crushing debt load have conspired to stoke the crisis.

Its financial difficulties over the past year have pushed the yield on its 10-year bond to a euro-era record of 8.4 percent _ an unsustainable level for the ailing country which is expected to enter a double-dip recession this year. It is also roughly the same level that eventually forced reluctant Athens and Dublin to accept help.

Despite that, Portugal continued to defy predictions it will be shut out of financial markets, announcing the sale of up to euro1.5 billion ($2.13 billion) in bonds on Friday and up to euro1 billion ($1.42 billion) in short-term Treasury bills next week.

The government quit last week in a dispute with opposition parties over a new batch of measures to restore the country's fiscal health.

President Anibal Cavaco Silva announced Thursday in a televised address to the nation that a national ballot for a new administration will be held on the first Sunday in June. He said Portugal faces "a huge challenge" to beat what he said was an "unprecedented" crisis.

Rating agencies have downgraded the country's credit worthiness three times in recent days, adding to market pressure on Portugal to accept financial help it has insisted it doesn't want or need.

On Thursday, the statistics institute also said that the 2009 deficit was 10 percent, higher than its previous calculation of 9.6 percent, and that public debt in 2010 was 92.4 percent of GDP _ meaning the amount Portugal owes is close to the amount of wealth it generates in a year.

Teixeira dos Santos, the finance minister, noted the outgoing government doesn't have the legitimacy to negotiate help, leaving the country in a perilous political limbo that will last more than two months.

Meanwhile, Portugal faces a major test of its finances in April when it has to rollover euro4.5 billion. Another crunch comes in June when it has to find euro4.96 billion ($7 billion) for another bond repayment.

The main parties, wary of the political stigma associated with a bailout, have all said they don't intend to ask for outside help. A bailout commits a country to fiscal policies which would limit politicians' room for maneuver.

All parties agree on the need to cut debt but differ over the scope and scale of austerity measures. The outgoing government has cut pay and pensions and hiked taxes, triggering protests including another rail strike Friday.

Ireland's financial collapse also brought down its government, with the main opposition party winning a later ballot.

Diego Iscaro, an analyst at IHS Global Insight, said a bailout is "very likely" and would provide breathing space for Portugal to enact reforms aimed at reviving a weak economy that has posted measly annual growth of less than 1 percent a year over the past decade.

However, "it's difficult to see where growth is going to come from," Iscaro said.

Domestic demand has slumped amid austerity measures such as tax hikes and pay cuts introduced by the outgoing government. Also, around a quarter of Portuguese exports go to neighboring Spain, where recession and unemployment around 20 percent have reduced consumption.