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Coelho Won’t Follow Spain in Seeking More Room on Deficit

Prime Minister Pedro Passos Coelho
Prime Minister Pedro Passos Coelho said in an interview Portugal will “absolutely not” alter the deficit goals it pledged in return for a European Union-led aid package last year. Photographer: Mario Proenca/Bloomberg

Prime Minister Pedro Passos Coelho said he won’t mimic Spain and seek to ease Portugal’s deficit targets to withstand a deepening recession.

Portugal will “absolutely not” alter the deficit goals it pledged in return for a European Union-led aid package last year, Passos Coelho said in an interview in Lisbon yesterday. “Spain is in a different situation. They have more space to maneuver to get to the target in 2013. We are in an adjustment program, so we cannot fail the targets.”

Passos Coelho is cutting spending and raising taxes in Western Europe’s poorest economy to meet the terms of a 78 billion-euro ($103 billion) aid plan that allowed the country to avoid default. Portugal pledged to creditors that it would limit the deficit to 4.5 percent of gross domestic product this year and trim the shortfall within the EU’s 3 percent limit in 2013.

Spanish Prime Minister Mariano Rajoy on March 2 defied European Union allies by raising Spain’s budget-deficit target for this year, saying a deepening economic slump and Spain overshooting last year’s targets will hamper efforts to rein in the euro area’s fourth-biggest shortfall. Rajoy announced a new estimate of 5.8 percent compared with the previously agreed 4.4 percent.

Recession Forecast

Portugal has trimmed its deficit from 9.8 percent in 2010, even after the economy contracted 1.5 percent last year. The European Commission forecasts the Portuguese economy will shrink by more than twice that rate this year, complicating efforts to reduce the budget gap.

Even with the deepening economic slump, Passos Coelho said he won’t seek concessions from creditors and follow Greece in trying to negotiate lower interest rates for its bailout loans.

“It’s a different situation,” he said. “Portuguese loans already have a very good interest level.”

Portuguese Finance Minister Vitor Gaspar on Nov. 30 said that the international aid loans have an average interest rate of between 4 percent and 5 percent, and average maturities of between 7 years and 12 years. In total, that results in an average annual interest rate of 4.3 percent, Gaspar said.

Portugal’s 10-year bond yield rose to a euro-era record 18.29 percent on Jan. 31, and was at 13.85 percent yesterday. On June 6, the day after Passos Coelho defeated former Prime Minister Jose Socrates to take power, it was 9.73 percent.

‘Illiquid Market’

“The secondary market is a very illiquid market, there are very few transactions,” Passos Coelho said. “There is still some pressure on the markets because people don’t know if Portugal is able to grow in the next years.”

Portugal’s aid plan assumes the country will regain access to medium and long-term sovereign debt markets in 2013, with the program’s last disbursement to be made in June 2014, the International Monetary Fund said in December. That month, European leaders declared that Greece’s situation is “exceptional and unique” and said they don’t foresee bondholder losses in other nations that seek assistance.

“The Portuguese government is getting all the positive results to avoid such a scenario,” Passos Coelho said. “I don’t see any kind of possibility that my government could in a few years ask to restructure Portuguese debt.”

Passos Coelho reiterated that if his country is unable to return to markets as planned in September 2013 due to “external reasons,” it would be able to count on continued support from the IMF, the European Commission and the European Central Bank.

Debt Peak

“I don’t want a scenario like that and I hope that external reasons don’t arise,” Passos Coelho said.

Portugal’s financial aid program is on track, while challenges remain as the country needs to step up its efforts on structural reforms, the IMF said on Feb. 28. The IMF said in December that debt is projected to peak at about 118 percent of GDP in 2013. Debt was 93.3 percent of GDP in 2010.

“Structural change needs some time to bring a positive impact on the economy,” Passos Coelho said.

Portugal’s economy shrank for a fifth quarter in the three months through December and the jobless rate rose to 14 percent, posting the sharpest increase since at least 1998. For next year, the Bank of Portugal forecasts GDP will grow and the country will post a current and capital account surplus.

“I’m sure in a few months when the results of the current year are stronger in the eyes of the analysts, Portugal will become a more favorable case of success,” Passos Coelho said.

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