Portugal faces uphill struggle to avoid a bailout of its own

By Andrei Khalip, Reuters

LISBON — Portugal has just a few months to persuade markets it can avoid becoming the next eurozone domino to fall by following Ireland in seeking a bailout, and its growth and fiscal outlook suggests it faces an uphill battle. Compared with Ireland and the single currency area’s first bailout beneficiary Greece, Portugal has a relatively manageable fiscal deficit and debt, no major problems at its banks and no property bubble — buying it time to prove it can still shape up unassisted. But it is struggling to meet fiscal targets for this year that, if missed, would likely raise already high servicing costs towards unsustainable levels in the run-up to a major debt repayment in April. Ireland applied on Sunday to the European Union and International Monetary Fund for a financial aid package to tackle its banking and budget crisis — switching market attention to where on the eurozone periphery the bailout axe might fall next.

Prime Minister Jose Socrates reiterated on Monday that Portugal needed no bailout, but high yield spreads on the country’s debt suggested Lisbon remained firmly in the firing line. “Portugal could be next and its public finances are under a lot of pressure,” said Diego Iscaro, an economist at IHS-Global Insight. “Still, meeting its 7.3 percent fiscal deficit target this year would lower the chance of having to go to the European stability fund. “If, however, the deficit is above the goal and the economy weakens, market pressure on Portugal will rise. They have a big bond repayment in April, so possibly some time in the first quarter they’ll have to go and ask for aid.” So far this year, the country’s fiscal consolidation has been disappointing. The core state sector deficit rose 2 percent in the first nine months of the year, but the government still insists it will meet its target of cutting the overall budget deficit to 7.3 percent of GDP this year from 9.3 percent in 2009. “Portugal’s main problem is that it doesn’t seem to be on track to meet its budget consolidation targets. A trigger (for aid) could be if the government doesn’t reach this year’s target,” said Ralph Solveen, a Commerzbank economist. “The January data (from the eurozone) could be important for that … The markets will then discuss the country in more depth, look at the weak growth prospects and the structural problems in the economy and that could drive interest rates up again,” he said.