International speculators prey on Portugal’s instability

Foreign speculators are speculating on Portugal’s ballooning public debt which now stands at 80 per cent of the GDP.

The casino-style attack, which aims to make a quick buck in the short term, has forced the Institute of Treasury Management (Instituto de Gestão da Tesouraria e do Crédito Público) to make the unprecedented step of issuing a communiqué aimed at calming the financial markets.

Portugal’s public sector finances and external trade deficit is in such a tattered state that several international rating agencies such as Standard & Poors and Moody’s say they want to see Portugal make swift moves to curbing state borrowing and reduce state expenditure or they will slash Portugal’s creditworthiness ratings.

That would mean it would cost more in terms of interest rates for the Portuguese State to borrow money on the international money markets.

It would also mean that existing debts and borrowing would carry higher interest rates if Portugal was downgraded further.

If Portugal doesn’t manage to get a handle on its precarious financial situation then, in the worst case scenario, the government could be forced to go cap in hand to the World Bank or International Monetary Fund for a bale-out.

In 2002, Portugal’s borrowing against its GDP stood at 135,433 million euros or 58.6 per cent.

That figure has now skyrocketed to 165,679 million euros or 80 per cent of GDP while spreads on treasury bonds (government debt) has already shot up from 0.67 percentage points to 0.90 percentage points.

That means that the State will have to find an extra 437 million euros in interest to service the national debt.

The situation has been made worse owing to the fact that the government has been unable to get consensus in Parliament for the State Budget for 2010 which is usually agreed in October.

The Prime Minister, who has pledged not to raise taxes to tackle to problem for fear of harming Portugal’s chance of economic recovery, says he is convinced that an agreement over the State Budget can be reached by the end of the month.    

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