Portugal Faces Strong Restrictions on Financing, Gaspar Says

The Portuguese economy is having trouble obtaining financing, with banks relying on the European Central Bank and the government tapping bailout funds, Finance Minister Vitor Gaspar said.

“The Portuguese economy is facing a very strong restriction on financing at present,” Gaspar said today at a conference in Oporto, northern Portugal. “Access to external private financing was interrupted” and funding “is maybe the biggest short-term challenge we face.”

Nine Portuguese banks today had their debt ratings cut by one or two levels by Moody’s Investors Service, which cited concern about funding, bad loans and holdings of government debt. Moody’s cut the “standalone” ratings of three banks, Banco Espirito Santo SA (BES), Banco Comercial Portugues SA (BCP) and Banco BPI SA (BPI), by two levels, the company said in a statement.

Portugal in April became the third euro-area country to seek a bailout after Greece and Ireland. It will receive 78 billion euros ($105 billion) under the agreement with the International Monetary Fund and the European Union. ECB President Jean-Claude Trichet on April 7 said the central bank “encouraged” Portugal to seek aid, adding that the country’s banks needed to reduce their reliance on ECB funding.

ECB Reliance

Portuguese lenders have turned to the ECB because the government’s struggle to narrow its budget deficit restricted their ability to borrow. The aid plan earmarks 12 billion euros for Portugal’s banks.

The ECB’s financing to Portuguese lenders rose for a second month in August as the debt crisis limited the banks’ ability to borrow. ECB financing increased to 46 billion euros from 44 billion euros in July, the Bank of Portugal said on Sept. 5. ECB financing levels peaked at 49.1 billion euros in August 2010.

“The diversification of sources of financing of Portuguese economic agents is a path we should follow,” Gaspar said today. “Portugal’s capital market has margin for growth.”

The economy is set to shrink this year and in 2012 as the government implements austerity measures and banks struggle to obtain financing. The government forecasts the economy will contract 2.2 percent this year and between 2.2 percent and 2.3 percent in 2012, before expanding 1.2 percent in 2013.

Prime Minister Pedro Passos Coelho is cutting spending and raising taxes to meet the terms of the aid plan from the EU and the IMF. The government aims to trim the budget deficit from 9.8 percent of gross domestic product in 2010 to 5.9 percent in 2011 and to within the EU ceiling of 3 percent in 2013. Debt will reach 100.8 percent of GDP this year and peak at 106.8 percent in 2013 before starting to decline, the government predicted on Aug. 31. Debt was 93.3 percent of GDP in 2010.

To contact the reporter 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.