May 12 (Bloomberg) -- Portugal may have followed Greece into recession even before implementing austerity measures demanded for its European Union bailout that are set to further choke the economic growth needed to tame the country’s debt.
Data to be released tomorrow may show the economy shrank 0.3 percent in the first quarter, economists surveyed by Bloomberg forecast, matching the contraction of the previous three months. The slump may deepen as the government starts executing the spending cuts and tax increases it agreed to in return for its 78 billion-euro ($111 billion) aid package.
“With the adjustment measures, the outlook for Portugal in the next few months isn’t good, particularly in terms of consumption,” said Francisco Vidal, an economist at Intermoney Valores SV SA in Madrid. Portugal, Ireland and Greece will make up the lagging group of European nations from an economic standpoint, he said.
As borrowing costs surged to record levels last month, Portugal became the third euro-area country to seek aid, following the bailouts of Greece and Ireland in 2010. The steps the government says will tame the euro region’s fourth-biggest budget deficit will lead the economy to contract 2 percent this year, twice the previous forecast, Finance Minister Fernando Teixeira dos Santos said on May 5.
The country’s two-year bonds now yield 11.7 percent, more than the 9.4 percent for 10-year debt. The spread means there is more perceived risk in lending to Portugal for two years than for a decade.
Greek Woes
Portugal is following the example of Greece, which has suffered from a deepening economic crunch as it implemented austerity plans. Greece, which received its 110-billion euro bailout a year ago, probably contracted for a sixth quarter, tomorrow’s data will show.
Spain, which has the region’s third-biggest deficit, grew about 0.2 percent in the first quarter, according to a Bank of Spain forecast. Ireland, which agreed to a 67.5 billion euro bailout in November, doesn’t report its latest gross domestic product figures until June.
The economic fallout from efforts by the so-called peripheral countries to control public finances is widening the gap with the region’s stronger economies. The German economy may have expanded as much as 1 percent in the first quarter, according to the Bundesbank. The government forecasts growth of 2.6 percent in 2011 after a record 3.6 percent expansion in 2010.
Yield Gap
That growing divide is reflected in the premium that investors demand to hold peripheral bonds over equivalent German debt. The spread between the yield on Portugal’s 10-year bonds and German bunds reached a euro-era record of 666 basis points on May 10 and was at 630 yesterday. For Greece the gap is at 1,239 basis points, while Irish bonds yield 756 basis points more than Germany’s.
Portugal’s borrowing costs rose at a May 4 sale of 1.12 billion euros of three-month bills, its most recent debt auction. The securities were priced to yield 4.652 percent, up from 4.046 percent at an April 20 auction. That’s more than Germany pays to borrow for 10 years.
Under the European portion of the bailout, Portugal will pay between 5.5 percent and 6 percent interest on loans averaging three years, EU Monetary Affairs Commissioner Olli Rehn said May 10. The goal is for Portugal to return to market for financing before the aid program runs out, Rehn said.
The Greek aid program also saw the country returning to markets and selling 27 billion euros of bonds next year. EU leaders are now considering a new aid package as prohibitive financing costs undermine that goal.
Bailout Rates
After a year of cost reductions and tax increases, Greece’s 10-year bond yields more than 15 percent, twice the rate at the time of the bailout a year ago.
EU finance ministers may discuss further aid to Greece at a meeting in Brussels on May 16, when they are also due to give final approval to Portugal’s bailout. That would give Portugal the first payment before a 4.9 billion-euro bond redemption in June. That’s the only maturity that the nation faces until June 2012.
Portugal had raised taxes and was implementing the deepest spending cuts in more than three decades before it was forced into the rescue that will require even more aggressive reductions and revenue measures.
The aid package calls for Portugal to take austerity steps that the government proposed and parliament rejected in March, leading to the collapse of Prime Minister Jose Socrates’s administration. Spending reductions for 2012 and 2013, including cuts to pensions, will amount to 3.4 percent of GDP and revenue increases will represent 1.7 percent of economic output.
June Elections
Elections on June 5 will determine what government is in place to implement the budget cuts.
Portugal’s aid program will allow the economy to start recovering in 2013, according to Teixeira dos Santos. Still, Portugal will need to grow faster than its historic rates to be able to reduce a debt that reached 93 percent of GDP last year.
The country’s economic growth has averaged less than 1 percent a year in the past decade, ranking among Europe’s weakest rates. Unemployment rose to 11.1 percent in the fourth quarter, the highest since at least 1998, as the economy contracted for the first time in a year.
“I have good faith that it will be able to deal with the austerity measures,” Steen Jakobsen, chief economist at Saxo Bank A/S, said in a May 10 interview with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.” “I have little faith that it will be able to become productive.”
The three-year aid plan pledges to reduce the budget deficit to 5.9 percent of GDP this year to 4.5 percent in 2012 and 3 percent in 2013. The government in March had targeted a deficit of 4.6 percent this year, 3 percent in 2012 and 2 percent in 2013.
To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net .
To contact the editors responsible for this story: Tim Quinson at tquinson@bloomberg.net .
Find out more about Bloomberg for iPhone: http://m.bloomberg.com/iphone/
Data to be released tomorrow may show the economy shrank 0.3 percent in the first quarter, economists surveyed by Bloomberg forecast, matching the contraction of the previous three months. The slump may deepen as the government starts executing the spending cuts and tax increases it agreed to in return for its 78 billion-euro ($111 billion) aid package.
“With the adjustment measures, the outlook for Portugal in the next few months isn’t good, particularly in terms of consumption,” said Francisco Vidal, an economist at Intermoney Valores SV SA in Madrid. Portugal, Ireland and Greece will make up the lagging group of European nations from an economic standpoint, he said.
As borrowing costs surged to record levels last month, Portugal became the third euro-area country to seek aid, following the bailouts of Greece and Ireland in 2010. The steps the government says will tame the euro region’s fourth-biggest budget deficit will lead the economy to contract 2 percent this year, twice the previous forecast, Finance Minister Fernando Teixeira dos Santos said on May 5.
The country’s two-year bonds now yield 11.7 percent, more than the 9.4 percent for 10-year debt. The spread means there is more perceived risk in lending to Portugal for two years than for a decade.
Greek Woes
Portugal is following the example of Greece, which has suffered from a deepening economic crunch as it implemented austerity plans. Greece, which received its 110-billion euro bailout a year ago, probably contracted for a sixth quarter, tomorrow’s data will show.
Spain, which has the region’s third-biggest deficit, grew about 0.2 percent in the first quarter, according to a Bank of Spain forecast. Ireland, which agreed to a 67.5 billion euro bailout in November, doesn’t report its latest gross domestic product figures until June.
The economic fallout from efforts by the so-called peripheral countries to control public finances is widening the gap with the region’s stronger economies. The German economy may have expanded as much as 1 percent in the first quarter, according to the Bundesbank. The government forecasts growth of 2.6 percent in 2011 after a record 3.6 percent expansion in 2010.
Yield Gap
That growing divide is reflected in the premium that investors demand to hold peripheral bonds over equivalent German debt. The spread between the yield on Portugal’s 10-year bonds and German bunds reached a euro-era record of 666 basis points on May 10 and was at 630 yesterday. For Greece the gap is at 1,239 basis points, while Irish bonds yield 756 basis points more than Germany’s.
Portugal’s borrowing costs rose at a May 4 sale of 1.12 billion euros of three-month bills, its most recent debt auction. The securities were priced to yield 4.652 percent, up from 4.046 percent at an April 20 auction. That’s more than Germany pays to borrow for 10 years.
Under the European portion of the bailout, Portugal will pay between 5.5 percent and 6 percent interest on loans averaging three years, EU Monetary Affairs Commissioner Olli Rehn said May 10. The goal is for Portugal to return to market for financing before the aid program runs out, Rehn said.
The Greek aid program also saw the country returning to markets and selling 27 billion euros of bonds next year. EU leaders are now considering a new aid package as prohibitive financing costs undermine that goal.
Bailout Rates
After a year of cost reductions and tax increases, Greece’s 10-year bond yields more than 15 percent, twice the rate at the time of the bailout a year ago.
EU finance ministers may discuss further aid to Greece at a meeting in Brussels on May 16, when they are also due to give final approval to Portugal’s bailout. That would give Portugal the first payment before a 4.9 billion-euro bond redemption in June. That’s the only maturity that the nation faces until June 2012.
Portugal had raised taxes and was implementing the deepest spending cuts in more than three decades before it was forced into the rescue that will require even more aggressive reductions and revenue measures.
The aid package calls for Portugal to take austerity steps that the government proposed and parliament rejected in March, leading to the collapse of Prime Minister Jose Socrates’s administration. Spending reductions for 2012 and 2013, including cuts to pensions, will amount to 3.4 percent of GDP and revenue increases will represent 1.7 percent of economic output.
June Elections
Elections on June 5 will determine what government is in place to implement the budget cuts.
Portugal’s aid program will allow the economy to start recovering in 2013, according to Teixeira dos Santos. Still, Portugal will need to grow faster than its historic rates to be able to reduce a debt that reached 93 percent of GDP last year.
The country’s economic growth has averaged less than 1 percent a year in the past decade, ranking among Europe’s weakest rates. Unemployment rose to 11.1 percent in the fourth quarter, the highest since at least 1998, as the economy contracted for the first time in a year.
“I have good faith that it will be able to deal with the austerity measures,” Steen Jakobsen, chief economist at Saxo Bank A/S, said in a May 10 interview with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.” “I have little faith that it will be able to become productive.”
The three-year aid plan pledges to reduce the budget deficit to 5.9 percent of GDP this year to 4.5 percent in 2012 and 3 percent in 2013. The government in March had targeted a deficit of 4.6 percent this year, 3 percent in 2012 and 2 percent in 2013.
To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net .
To contact the editors responsible for this story: Tim Quinson at tquinson@bloomberg.net .
Find out more about Bloomberg for iPhone: http://m.bloomberg.com/iphone/
No comments:
Post a Comment