Portuguese economy suffering ahead of austerity budget

Portugal’s borrowing costs jumped to the highest level since the adoption of the euro amid uncertainty about whether the government can cut the country’s debt levels.

The interest rates on Portuguese 10-year bonds leaped yesterday to 6.5% from 6.05% at the start of the day.

The rate was the highest since Portugal adopted the euro in 1999.

The rise came two days before a planned bond issue which aims to raise up to €1bn.

Portugal, which has struggled to generate economic growth in recent years and became burdened with additional welfare costs as the jobless rate surpassed 10%, is viewed as one of the euro zone’s most vulnerable members because of its high debt load.

The centre-left Socialist government is currently preparing next year’s state budget which it says will slash the budget deficit to 4.3% of gross domestic product.

It said its austerity plan will reduce the budget deficit to 7.3% this year from 9.3% in 2009.

However, a lack of detail about its plans and predicted low growth this year deepened investor concerns.

“Even if the government comes up with a tough budget it seems to me it will be too late to pacify the markets,” said Filipe Silva, a debt market manager at Portugal’s Banco Carregosa.

The minority government has not said when it will send its 2011 state budget to Parliament.

The main opposition centre-right Social Democratic Party said it will support the bill only if it includes deep cuts in spending.