15 May 2012

WSJ: Portugal's progress won't guarantee funding

The Bank of Portugal said that Portugal is quickly adjusting its economy to a more frugal reality under a €78 billion bailout package, but the programme's success doesn't guarantee the country will be able to return to markets next year.

The Portuguese government has repeatedly said it will meet all its bailout requirements, but has acknowledged that trouble in the rest of the eurozone could make it difficult to win financing from the markets next year.

In an annual review of the nation's economy, the central bank said the government last year significantly consolidated the budget on both the revenue and spending sides, trimming the budget deficit to 4.2 per cent of gross domestic product from 9.8 per cent in 2010, helped by a one-off gain from the transfer of pension assets from banks. The country remains on track to meet a deficit target of 4.5 per cent of GDP this year, and 3 per cent in 2013, the bank added.

Meeting those targets is essential for Portugal to continue receiving help from its European Union peers and the International Monetary Fund under Lisbon's bailout package, which runs through 2014. It is also important for the country to regain investor confidence and return to the markets for financing in 2013.

Prime Minister Pedro Passos Coelho, expressing concern over the turmoil in Greece, urged leaders to honour commitments to the EU and the IMF. The government's finances are taken care of for this year as long as it abides by its bailout agreement, but Portugal must regain full access to capital markets next year to help repay some €10 billion in debt due in September 2013. While that is still far off, the IMF could require Portugal to present its financing plans a full year ahead before releasing more aid, as it did with Greece.

Economists say Portugal's ability to find new markets for its products is key, particularly because its main trade partner, Spain, is mired in recession. The central bank said the Portuguese seem to be saving as much now as they were in early 2011. Because salaries have fallen since then, the savings rate had been expected to drop.

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