Tough budget to cut Portugal's deficit

PORTUGAL HAS vowed to meet ambitious deficit-reduction targets in an effort to calm concern over its economy that is forcing the government to pay exceptionally high yields to finance its debt.

“We’re on the right track and we will meet our deficit commitments this year and in the future,” Carlos Costa Pinto, the secretary of state for the treasury, said yesterday. “There is no cause for alarmism.”

He was speaking shortly after Portugal was forced to pay high yields of 4.69 and 6.24 per cent respectively in an auction of four- and 10-year government bonds.

The issue attracted strong demand, but the government raised only €750 million, at the bottom end of its expected range.

Like Ireland, Portugal has faced growing pressure in recent days amid concern that it may have to follow Greece in seeking emergency financial support. Some economists consider Portugal to be more vulnerable because of a weaker than expected budget performance this year and owing to the risk of political tensions.

Data this week showed Portugal to be the only peripheral euro zone member to have failed to make significant progress in consolidating its public finances this year, with the deficit increasing by €400 million in the first seven months compared with the same period last year. Christoph Weil, an analyst with Commerzbank, said the government target of reducing the deficit from a record 9.4 per cent of gross domestic product in 2009 to 7.3 per cent this year seemed “barely possible”.

The minority socialist government has insisted it will do “whatever it takes” to meet its deficit targets, raising the prospect of additional austerity measures being rushed through parliament.

Reassuring markets will also require political consensus on a tough 2011 budget, in which the government is committed to cutting the deficit to 4.8 per cent of GDP.This year’s poor budget performance has increased tensions between the government and the centre-right opposition, whose support is vital for the budget proposals to be approved.– (Copyright The Financial Times Limited 2010)