Investors are worried the government won’t be able to meet
its debt obligations and may need a bailout like those provided to Greece and
Ireland last year.
Borrowing rates edged up across much of the rest of Europe
after a euro zone growth figure was revised down, but traders were by far most
worried about Portugal — its 10-year government bond yield spiked above 7.1
percent.
The country is one of the 17-nation euro zone’s smaller
members, accounting for less than 2 percent of the bloc’s gross domestic
product. But its difficulties could stoke the continent’s debt crisis,
especially by placing pressure on its much larger neighbor Spain, which also
has debt problems.
“While the relatively small size of Portugal’s funding needs
suggests that a Portuguese bailout will not exert a huge amount of pressure on
the euro zone support fund, it will raise the risk of a speculative attack on
the Spanish debt market,” Jane Foley, senior currency strategist at Rabobank
International, wrote in an analysis.
The Bank of Tokyo-Mitsubishi noted that whereas Ireland’s
loan maturity average is seven years at an average cost of 5.8 percent,
Portugal’s 7-year bonds are now trading at 6.6 percent.
Portugal aims to raise 1.25 billion euros next week by
auctioning off 3-year and 9-year bonds next week in a key test of investor
confidence.
The government insists it doesn’t need financial help and
says its debt reduction plan is on track.
Prime Minister Jose Socrates said Friday that state revenue
was higher than forecast last year and spending was lower than expected,
helping Portugal to meet its budget deficit target of 7.3 percent. Meanwhile,
the economy is estimated to have grown by at least 1.3 percent in 2010.
Socrates said those figures “should help instill confidence
in the markets.” However, analysts expect an austerity plan featuring tax hikes
and pay cuts to cast Portugal into recession this year.
That would hurt tax revenue and place further stress on the
budget which is already being drained by high interest rates on its borrowings
and increased welfare payments resulting from a jobless rate that has risen to
11 percent.
Fears that economic growth in Europe will be slow and drag
on governments’ efforts to raise income were heightened by a downward revision
to the euro zone’s GDP growth in the third quarter of 2010. Eurostat, the EU’s
statistics agency, said output rose by only 0.3 percent, down on the previous
estimate of 0.4 percent and way below the 1 percent growth recorded in the
second quarter.
Business investment fell and personal spending declined,
suggesting the region is in for a prolonged period of weak growth and
government belt-tightening will be harder than expected.
The Lisbon benchmark stock index was down 1.15 percent,
dragged lower by a fall in shares in Portuguese banks which are exposed to
national debt. Spain’s index was down 1.42 percent.
