Germans warn Portugal heading for Greek tragedy

By CHRIS GRAEME [email protected]

A leading German politician has warned that Portugal is not doing enough to avoid bankruptcy.

Michael Meister, a leading light in Angela Merkel’s Christian Democratic Party, said last week that Portugal needed to boost its efforts if it wanted to avoid Greece’s fate.

In an interview in Berlin, the party’s deputy chairman and finance spokesman said that Portugal’s economic growth was “sagging” and that the Government “lacked resolve to make companies and wages more competitive”.

He added that the Government could make a start by “investing more in education and new technology”.

“Every country has to do its bit to boost their economy in the Euro region, not just wildly cut spending as Portugal has done,” the lawmaker said, adding that “more input from Portugal was desirable”.

In July the Bank of Portugal said that Portugal’s economy would expand 0.9 per cent this year and 0.2 per cent next year. Germany’s is set to grow by 3.4 per cent.

The comments from the German finance spokesman sent shockwaves across the international markets over fears that Portugal will have to go cap-in-hand to the IMF for a bail-out loan.

But Finance Minister Fernando Teixeira dos Santos said on September 10 that Portugal wouldn’t need money from the IMF rescue fund.

“We have already financed almost 90 per cent of our needs for this year so there’s no need to knock on the door of any kind of special rescue programme,” he told Bloomberg Television in Hong Kong.

Even so, Portugal’s borrowing costs on the international money markets hit a record high earlier this month.

The yield spread difference between 10-year bonds for Portugal and Germany, Europe’s benchmark, stood at 335 basis points last week and had hit 372 basis points on September 8.

On September 15, the IGCP, an institute which manages Portuguese public debt, issued 750 million Euros worth of treasury bonds with a 12 month maturity, offering a interest rate of 3.369 per cent – the highest for many years.

The interest rate represents a 22.2 per cent increase on the last issue with the same maturity, which had been 2.756 per cent.

Yet despite the high interest rates, demand was lukewarm at auction, an indication that investors that would buy Portuguese Government debt may not think they are worth the paper they are printed on. 

Portugal is getting ever more into debt as the cost of issuing treasury bonds soars. In 2008 Portugal issued 14.0 billion Euros of Sovereign Debt onto the financial markets. By 2009 that had climbed to 20.9 billion Euros. In September this year it stood at 30.6 billion Euros.

Put simply, it means that Portugal is getting into deeper debt by 2.5 million Euros an hour.

Last year, between January and August, the country’s debt increased by 11.1 billion Euros and now the Government is exhausting the debt capacity authorised it by the Portuguese Parliament.

A Brussels-based financial expert, Juergen Kroeger, said last week that “Portugal has a real economy problem: it clearly has to improve its competitiveness and concessions are necessary over wages”.

He also added that Portugal needed to instigate more structural reforms even though the country had taken short and medium-term measures.

And there was further criticism for the Government, this time from former PSD finance minister, Bagão Felix who told Diário Económico over the weekend that “it was increasingly inevitable that Portugal would have to go the IMF for help in keeping the economy going as outside credit sources dried up”.

In 2009 Portugal’s budget deficit was put at 9.3 per cent of GDP while the Government plans to reduce that to 7.3 per cent this year and three per cent by 2012.