An agreement by Portugal’s new Socialist government to draw up “Plan B” deficit cuts to ensure its “anti-austerity” budget complies with EU rules has done little to satisfy investors who are continuing to penalise the country’s government bonds.
Amid wider market volatility, Lisbon’s benchmark 10-year government borrowing rate jumped 44 basis points before falling 42bp, capping one of the worst weeks for the country’s markets for at least two years.
Since the start of the year, falling bond prices have added more than 2 per centage points to Portugal’s 10-year borrowing rate, which hit a 23-month high of 4.53 per cent on Thursday. The country’s PSI 20 stock index has dropped more than 15 per cent over the same period.
A general flight to safety in global markets has encouraged investors to sell out of Europe’s southern periphery in favour of core EU countries. But concern over Portugal’s spending plans and potential political instability has intensified risk aversion among bond investors.
Portugal’s economy also slowed in the last quarter of 2015, expanding 1.2 per cent in volume compared with 1.4 per cent in the previous three months, according to figures released on Friday by the National Statistics Institute. Average growth last year was 1.5 per cent, up from 0.9 per cent in 2014.
Additional measures
Eurozone finance ministers this week welcomed a commitment by Lisbon to prepare “additional measures to be implemented when needed” as a guarantee that its 2016 budget would conform with the EU’s growth and stability pact.
Mário Centeno, Portugal’s finance minister, said Lisbon had agreed to table the extra deficit-reduction measures requested by Brussels, but added that he was “certain they will not be needed”
Last week Portugal was forced to table almost €1billion in additional tax increases to avoid becoming the first eurozone government to have its budget rejected by the European Commission.
Germany has also urged Lisbon not to ease up on fiscal discipline. Moving away from the path followed by the previous government would be "dangerous for Portugal", Wolfgang Schäuble, German finance minister, said before the eurogroup meeting, noting that "markets are already getting nervous".
The pressure on Lisbon comes amid a tussle with Brussels over plans by the new Socialist government, which is supported in parliament by the far left, to “turn the page on austerity” after four years of punishing cuts under the previous centre-right administration.
A growing number of centre-left eurozone leaders have been openly critical of the EU’s tough budget rules and are closely monitoring the progress of the three-month-old Lisbon government as it seeks to roll back austerity in a bid to promote stronger economic growth.
António Costa, the new prime minister, attributed the rise in bond yields to market volatility across the eurozone, but said the decision by the eurogroup meeting of finance ministers to approve his budget plans would “strengthen confidence” in Portugal.
“We are paying close attention to what is happening,” he told reporters. “We have every reason to feel confident about our budget plans and our ability to meet all our objectives.”
‘Plan B’
Eurozone finance ministers endorsed the commission ‘s earlier decision to accept Portugal’s revised spending plan and to meet their request for additional “Plan B” deficit-reduction measures.
"We very much welcome the commitment of the Portuguese authorities to prepare upfront additional measures to be implemented when needed," said Jeroen Dijsselbloem, Eurogroup president.
Pierre Moscovici, the EU's economic and financial affairs commissioner, said the Lisbon government had "made clear their determination to do what's necessary to ensure conformity" with the stability and growth pact.
The commission said that although Portugal envisaged cutting its underlying structural deficit by between 0.1 and 0.2 per cent of gross domestic product this year - lower than the 0.6 per cent required under EU rules - it was not “in particularly serious non-compliance”.
Amid concerns over the budget, bond investors have focused attention on the possibility of Portugal losing its only investment grade credit rating, if the DBRS rating agency were to decide on a downgrade in April.
This would mean that Portuguese government bonds were no longer eligible for purchase under the European Central Bank’s quantitative easing programme, which has helped keep down government borrowing costs over the past year.
The Financial Times Limited 2016