Portuguese Budget Deficit Widens 5 Percent as Borrowing Costs Hit Record

Portugal’s budget gap widened in the first eight months of the year, indicating the government may struggle to rein in the euro-region’s fourth-largest deficit as its borrowing costs surged to a record.

The central government’s shortfall rose to 9.19 billion euros ($12 billion) from 8.74 billion euros a year earlier, the Finance Ministry said late yesterday. Tax revenue rose 3.3 percent, more than budgeted, and spending increased 2.7 percent, in line with budget estimates, the ministry said.

Portugal’s borrowing costs rose to a euro-era record yesterday, on concerns over the government’s ability to rein in the region’s fourth-largest budget deficit while avoiding a return to recession. While the extra yield investors demand to hold Portuguese debt rather than German equivalents eased to 388 basis points today, that’s still close to the level Greek bonds were trading at in April when the European Union offered the country emergency loans to avoid default.

“The deficit isn’t narrowing, in contrast with the general trend of other euro zone countries,” said Giada Giani, an economist at Citigroup in London. “This puts Portugal in a worse position relative to Greece, or Spain, or Ireland.”

She sees the overall public deficit at around 9 percent of gross domestic product at the end of 2010 unless there’s “significant narrowing” in the last few months of the year.

The government aims to narrow the overall deficit to 7.3 percent of GDP in 2010 from last year’s 9.3 percent, the region’s largest after Ireland, Greece, and Spain. The government has pledged to reach the target, with Finance Minister Fernando Teixeira dos Santos saying Sept. 9 that the country “can’t afford” not to. It intends to reach the EU limit of 3 percent in 2012.

By contrast, Spain slashed its seven-month central government deficit in half from a year earlier, and the yield on its 10-year debt fell to 4.22 percent today from 4.88 percent on June 16. Ireland and Greece also reduced their budget deficits in the first eight months.

Tax Increases

Portugal’s minority Socialist government, lead by Prime Minister Jose Socrates, has pledged to reduce hiring of public workers, while raising taxes and postponing public infrastructure spending. Still, the results of its efforts are “a bit disappointing,” said Emilie Gay, an economist at Capital Economics in London.

Michael Meister, a senior member of German Chancellor Angela Merkel’s party, added to pressure on the government on Sept. 14, saying Portugal must step up its efforts to overhaul its economy.

Portugal has already funded around 90 percent of its financing needs for this year, Teixeira dos Santos said on Sept. 10, and the country doesn’t face a bond redemption until April 2011.

No ‘Rescue’

There’s “no need to knock on the door of any kind of special rescue program,” the minister said in an interview with Bloomberg Television in Hong Kong. Klaus Regling, the head of the bailout fund known as the European Financial Stability Facility, said yesterday he doesn’t expect any country will need to tap the fund. Portugal’s Treasury plans to sell four-year and 10-year bonds tomorrow.

The extra yield investors demand to hold Portuguese 10-year debt rather than German equivalents compares with a risk premium of 398 basis points on Greek debt on April 11 when the euro region agreed to offer that country emergency loans to avoid default. The EU followed the Greek loan with the creation of a 750 billion-euro backstop for high-deficit nations, which has yet to be used.

With the yield on Portuguese 10-year bonds at 6.35 percent, after hitting a euro-era record of 6.39 percent yesterday, Portugal may also risk tipping the economy back into recession as the government’s contribution to GDP shrinks. Portugal has barely grown for a decade, with the expansion averaging less than 1 percent annually since 2000.

Growth to Slow

“With low growth and this level of interest rates, eventually you have a problem with the debt and that’s what markets are nervous about,” said Luigi Speranza, an economist at BNP Paribas in London, who expects a return to recession in the second half. Low growth “also makes life for the government a bit more difficult, the commitment to fiscal consolidation can vanish,” he said.

The economy grew 1.1 percent in the first quarter from the previous three months and 0.3 percent from April to June. Still, second-quarter GDP was propped up by government spending, which grew 3.9 percent, according to data from the National Statistics Institute. The Bank of Portugal in July predicted annual growth will slow to 0.2 percent in 2011 from 0.9 percent this year.

To contact the reporters on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net; Joao Lima at jlima1@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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