Portugal: Austerity’s First Casualty
03/29/2012 4:55 pm EST
Portugal’s new forecast for no growth next year could be a sign of things to come for the Eurozone’s other problem nations, warns MoneyShow.com’s Jim Jubak, also of JubakPicks.com.
It’s only Portugal, true, but the trend is ominous for all the Eurozone countries trying to meet austerity budget deficit targets in 2012.
Today, the Bank of Portugal cut its forecast for the country’s economic growth to a 3.4% drop in GDP in 2012 from the central bank’s January forecast of a 3.1% decline. The Portuguese economy contracted by 1.6% in 2011.
The central bank also cut its already barely positive forecast for 2013 from growth of 0.3% to a projection of zero growth for next year.
The Bank of Portugal now forecasts that investment will drop by 12% in 2012 and price consumption will fall by 7.3%. Exports will climb a forecast 2.7% in 2012.
Like Greece and Ireland, Portugal needed a bailout—$104 billion—from the European Union, the European Central Bank, and the International Monetary Fund (IMF), as its borrowing costs soared and the country found itself shut out of the international bond markets.
That bailout was predicated on an austerity plan of budget cuts and tax increases that would bring the country’s deficit under control and allow Portugal to return to the financial markets in 2013.
Snowball’s chance in Oporto.
In 2011, Portugal narrowed its budget deficit to 4% of GDP from 9.8% in 2010, but it got big help from a one-time transfer of pension funds from the banks to the national government. The government is still projecting that Portugal’s budget deficit will come in at 4.5% in 2012 before falling to 3%—the Eurozone’s ceiling for budget deficits—in 2013.
Hard to see how those estimates won’t go up with the new, lower growth forecasts from the central bank.
Combine this with news yesterday that Standard & Poor’s thinks Greece will “probably” have to restructure its debt again, and you can see why worry about the European debt crisis is on an upswing. Moritz Karamer, head of sovereign debt ratings at S&P, said a restructuring would be "down the road, I'm not predicting today when."
In a vastly reassuring speech at the same event at the London School of Economics, the head of the International Monetary Fund’s mission to Greece said it would take at least a decade to fully complete a Greek restructuring.
European finance ministers begin a two-day meeting tomorrow with increasing the cap for the Eurozone bailout fund on the top of the agenda. The deal on the table involves a temporary increase in the cap to 2013, but certainly not an increase in government commitments of the magnitude that the International Monetary Fund has been seeking.
It will be “interesting” to see if the IMF—and the financial markets—buy into this latest slight of hand.