Financial plight deepens in Portugal

Portugal’s financial plight has deepened after official figures showed its budget deficit last year was 8.6% of GDP – way above the government target of 7.3% intended to ease 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 and debt repayments it cannot afford.

The deficit figure is far above the eurozone’s limit of 3 %, 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 %, showing that his austerity measures are paying off.

Though Portugal’s economy represents less than 2 % 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.

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 8.26 % – an unsustainable level for the ailing country which is expected to enter a double-dip recession this year.

Despite that, Portugal continued to defy predictions it will be shut out of financial markets, announcing the sale next week of up to €1bn in short-term Treasury bills.

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

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 does not want or need.

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

Portugal’s president was due to meet with his advisers today before probably announcing a date for the election of a new government.

The date is key because before it can take a bailout, Portugal first needs a government in power to negotiate the terms of a package.