Portuguese Debt Concerns Misdirected

BY GRANT DE GRAF

LISBON—Portugal has indicated its intent to operate within tight fiscal targets irrespective of the impact which high oil prices and raw materials may have on the economy, according to senior Portuguese officials.

"We have correction mechanisms that will allow us to meet the targets we have set," Mr. Teixeira dos Santos said at a Reuters-Radio TSF conference in Lisbon. "Whatever happens, we will not miss the budget targets we have established."

Investors are keeping a close eye on budget numbers being released by the country, which has pledged to cut this year's deficit to 4.6% of gross domestic product from about 7% last year. The deficit stood at 9.3% in 2009, raising fears that Portugal could default on its debt-repayment obligations.

If a disciplined approach towards fiscal policy is an ingredient towards recovery, then Portugal seems committed towards achieving that goal.

The government last year launched a series of austerity measures designed to shrink its expenditures and increase revenue, mostly through salary cuts in the public sector and tax increases.

The notion of extreme pressure on Portugal to seek an international bailout is unsubstantiated, despite reports to the contrary, amongst gossip mongers.

Mr. Teixeira dos Santos said at the conference that markets are "over-reacting" about the euro zone's capability to control its finances, although he criticized the bloc, saying it has been slow in tackling sovereign-debt problems that started with Greece.

It is still unclear as to whether Portugal's predicament is a direct consequence of the Greek and Irish Bailouts, or rather a function of a general downturn in demand for goods and services, and symptomatic of the severe economic recession.

"There is a deficiency in the euro. We don't have a common mechanism to control budgets and taxes in the euro zone," said Mr. Teixeira dos Santos. The difficulty of balancing a fiscal policy that is localized to specific regions within the EU, with a centralized monetary policy will continue to be a challenge for all countries within the EU.

Mr. Teixeira dos Santos also said he hopes the March 11 and 24 meetings of European Union leaders to discuss steps to tackle the region's debt crisis, will help stabilize the euro zone. He would be well advised to take advantage of the opportunity to seek a comprehensive loan package. This could be achieved with favorable terms and justifiable, irrespective of the absence of the emergency bailout conditions that were evident in Greece and Ireland.

Among the measures Portugal is backing for the meetings is an increase in the scope and lending capacity of the €440 billion ($605.13 billion) European Financial Stability Facility.

Although reports have indicated that a successful agreement among EU members is crucial for Portugal, this is unfounded. Given Portugal's paltry debt exposure relative to other EU countries, it is unlikely that a new agreement will have any impact on Portugal at all.

Further, critics have suggested that Portugal will be hard pressed to service high borrowing costs. Because the loans are marked in Euros and indirectly supported by the ECB, attributing higher interest rates to Portugal would seemingly be unfair. Alternatively, they should be viewed as an arbitrage opportunity in which investors achieve a higher rate of return, for a risk which might be attributable to the European Central Bank.

A more important consideration is the challenge of formulating a blueprint that will contribute towards the revival of Portugal's economy. With its major trading partner, Spain, floundering and potentially in a more catastrophic position than Portugal, this will be difficult.

Sources: http://online.wsj.com/article/SB10001424052748704615504576171884219508072.html