Portugal: turning down the heat

Financial Times

Fire-fighting is a maddening business. While eurozone leaders focus on the region’s biggest blaze – Greece – smouldering difficulties in Portugal are flaring up again. The yield on Portuguese 10-year government bonds has leapt more than 2 percentage points since its downgrade to junk two weeks ago. Now they are above 14 per cent. Never has the prospect of Portugal – recipient of a €78bn bail-out package last year – returning to the debt markets by 2013 looked more distant.The anxiety stems partly from the downgrade by Standard & Poor’s (Moody’s already rated Portugal as junk). The second downgrade, however, pushed the country out of benchmark bond market indices, forcing some investors to drop its debt. Tortuous negotiations with Greece’s private creditors over debt relief have also triggered fears of contagion – even if European officials insist that the Greek situation is a one-off. But the biggest problem is the one which has dogged Portugal all along: concerns that lack of growth and weak competitiveness will make its debt burden – over 105 per cent of gross domestic product and rising – unsustainable. Its economy contracted by up to 2 per cent in 2011, but a decline of more than 3 per cent is expected this year. And fiscal targets were only met due to one-off pension fund transfers. The deficit would otherwise have topped 7 per cent of GDP.

But there have also been bright spots. Export performance was good for much of last year. And the new government has proved stable and effective, pushing through badly-needed reforms, to praise from its lenders. This then could be an opportunity for eurozone leaders to get ahead of events. Portugal’s current rescue package expires in 2013, so a decision on whether to extend it should be taken this year. Why not act quickly and scotch any fears of imminent private sector involvement? Speed, after all, is the best way of limiting fire damage.


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