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World Looking at Portugal as EU’s Next Financial Domino

It has not been a good week for Portugal. Not only did its combined bid with Spain to host the World Cup soccer tournament in 2018 over Russia flop resoundingly, but all eyes appear to be focused on the nation as the next to require some type of financial bailout from the European Union.

When Ireland announced it would cave to international pressure and accept a bailout from the EU and International Monetary Fund for about $90 billion, the negative focus soon turned toward Portugal at a shocking pace. After official bailout acceptances this year from Greece and Ireland, Portugal was seen widely as the next European debt-saddled nation to stumble toward the need for a lifeline.

And the outlook update from at least one ratings agency this week did not help matter. Standard & Poor's, who moved to cut the credit ratings of both Greece and Ireland months before their official requests for bailout loans, placed the republic "on CreditWatch with negative" implications:

"‘The CreditWatch placement reflects our view of increased risks to the government's creditworthiness,' said Standard & Poor's credit analyst Frank Gill. ‘These risks stem from uncertainty about the government's possible recourse to official funding and the consequences that obtaining such funding
could have for the position of private-sector creditors vis-a-vis official
creditors after 2013.'

In 2011, Portugal's minority government is set to implement an ambitious fiscal austerity program with an emphasis on reducing expenditures. However, we see the government as having made little progress on any growth-enhancing reforms to offset the fiscal drag from these scheduled 2011 budgetary cuts. In
particular, we believe that policies the government has pursued have done little to boost labor flexibility and productivity. As a consequence of the Portuguese economy's structural rigidities and the volatile external conditions, we project that the economy will contract by at least 2% in 2011 in real terms. The downward revision to our growth projection also reflects the fact that Portugal has not reduced its large external current account deficit during 2010.

In addition to what we view as the economy's weak growth prospects, the large stock of Portuguese debt that non-residents hold (54% of GDP) has increased the government's vulnerability to rising real interest rates. This contributes to the country's large gross external financing needs and, we believe, raises the likelihood that Portugal will seek external assistance from the EU."

(Editor's Note: See coverage of the Irish bailout in this week's eNews at www.nacm.org).

Brian Shappell, NACM staff writer

 

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