EU sweats as Portuguese bid to raise €1.25 billion
The release of a report by their central bank yesterday saying the economy will shrink by 1.3% this year, immediately increased interest rates on Portuguese debt to more than 7%, above which borrowing is considered unsustainable.
The rates had dropped below the critical 7% for a time, reportedly on foot of major buying of Portuguese bonds by the ECB, which included purchases of 10-year paper. Up to now they mainly purchased only shorter term two and four-year sovereign debt.
Should Portugal be forced to turn to the EU-IMF fund it is widely expected that this will “uncork the Spanish bottle”, forcing Madrid to borrow from the fund also.
Many sources report that Germany and France believe Portugal should accept loans from the fund and remove themselves from the market in an effort to remove pressure from the euro. Both Paris and Berlin officially deny they are applying any such pressure.
German chancellor Angela Merkel, following reports from Lisbon that their budget deficit for 2010 is substantially lower than the 7.3% of GDP expected, praised the efforts being made by the country.
Portugal’s Prime Minister Jose Socrates said lower than expected deficit figures showed that his country did not need to turn to the EU-IMF. The fact that he leads a minority government is also leading to uncertainty in the markets.
The main problems with Portugal’s economy is that growth has been stagnant for several years and it has lost competitiveness because of serious structural problems.
Tax increases and wage and spending cuts appeared to restore some confidence, but these measures were pinpointed by Portugal’s central bank yesterday as likely to affect growth. Further spending cuts and a VAT increase are included in yet another austerity budget for 2011.
