Portugal economy to shrink, but Prime Minister rules out bailout package



portugal

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The Portuguese government has ruled out accepting any international bailout package even as the Central bank of Portugal painted a gloomy picture for the economy in 2011 with projections of the economy shrinking by 1.3 percent due to government spending cuts.

Prime Minister Jose Socrates seemed to be content with the ‘excellent’ budget execution in 2010 and said his country will not seek any external assistance to deal with deficits.

The Bank of Portugal’s projection of the economy shrinking by 1.3 percent is in stark contrast to the government’s forecast of the economy growing by 0.2 percent.

The government has managed to beat its own forecast of 7.3 percent budget deficit and is expecting better results will convince investors to buy sovereign bonds. However, if the economy shrinks this year, Portugal may find it extremely difficult to meet its deficit target of 4.6 percent this year.

A central bank employee on Monday disagreed with government’s stated position and said it will be wise to seek international assistance now.

According to news agency Lusa, central bank board member Teodora Cardoso said: “It would be easier if we had foreign help because this would mean that the adjustment would not be so abrupt, but if we do it alone, for the markets to believe in it, it has to be brutal”.

The European Central Bank has already stepped in to buy government bonds ahead of a planned sale from Wednesday and may tilt the balance in Portugal’s favor, enabling the government to borrow at cheaper rates.

Analysts believe that Portugal may slip into recession this year and the trends have already started to emerge since December 2010.

“Based on recent data for industrial production, construction output and retail sales … our expectation that real GDP contracted in the fourth quarter by around 0.4 percent (quarter-on-quarter) is being borne out”, said analysts from Barclays.

However, Prime Minister Socrates believes that deficit reduction of more than 2 percent in 2010 over the high of 2009 should convince Brussels.

“The country is doing its work and is doing it well… Portugal is one of the countries in Europe that cut its deficit most in 2010. I’d like to point out that the Portuguese government and Portugal will not ask for any aid or financial assistance for the simple reason that it is not necessary”, he told to reporters.

Unfortunately not too many analysts are optimistic with the deficit cut alone. Filipe Garcia, head of Informacao de Mercados Financeiros consultants in Porto said “Portugal’s fate has been out of its own hands for some time and even if the deficit was 3 or 4 percent, it would not change the situation”, indicating better fiscal discipline will not offset a shrinking GDP.

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