It has not been a good week for Portugal. Not only did its combined bid with Spain to host the World Cup soccer tournament in 2018 over Russia flop resoundingly, but all eyes appear to be focused on the nation as the next to require some type of financial bailout from the European Union.
Ireland announced it would cave to international pressure and accept a
bailout from the EU and International Monetary Fund for about $90
billion, the negative focus soon turned toward Portugal at a shocking
pace. After official bailout acceptances this year from Greece and
Ireland, Portugal was seen widely as the next European debt-saddled
nation to stumble toward the need for a lifeline.
And the outlook
update from at least one ratings agency this week did not help matter.
Standard & Poor's, who moved to cut the credit ratings of both
Greece and Ireland months before their official requests for bailout
loans, placed the republic "on CreditWatch with negative" implications:
CreditWatch placement reflects our view of increased risks to the
government's creditworthiness,' said Standard & Poor's credit
analyst Frank Gill. ‘These risks stem from uncertainty about the
government's possible recourse to official funding and the consequences
that obtaining such funding could have for the position of private-sector creditors vis-a-vis official
creditors after 2013.'
2011, Portugal's minority government is set to implement an ambitious
fiscal austerity program with an emphasis on reducing expenditures.
However, we see the government as having made little progress on any
growth-enhancing reforms to offset the fiscal drag from these scheduled
2011 budgetary cuts. In particular, we believe that policies the
government has pursued have done little to boost labor flexibility and
productivity. As a consequence of the Portuguese economy's structural
rigidities and the volatile external conditions, we project that the
economy will contract by at least 2% in 2011 in real terms. The downward
revision to our growth projection also reflects the fact that Portugal
has not reduced its large external current account deficit during 2010.
addition to what we view as the economy's weak growth prospects, the
large stock of Portuguese debt that non-residents hold (54% of GDP) has
increased the government's vulnerability to rising real interest rates.
This contributes to the country's large gross external financing needs
and, we believe, raises the likelihood that Portugal will seek external
assistance from the EU."
(Editor's Note: See coverage of the Irish bailout in this week's eNews at www.nacm.org).
Brian Shappell, NACM staff writer