Mish<>Portugal Central Bank Warns of Fiscal Deficit Slippage and Recession; Greek 1-Year Yield Tops 150%
Via email, Barclays Capital offered thoughts on "Potential Fiscal Slippage" in Portugal.
The Central Bank of Portugal warned the economy might fail to meet budget deficit targets set for this year and next under the EU/IMF programme (5.9% and 4.5% of GDP, respectively), unless it takes "significant additional measures".
Contraction Two More Years
According to the report, lower-than-previously projected GDP growth and lack of implementation of structural reforms (as opposed to one-off actions) would be responsible for the anticipated fiscal slippage in 2012. The Central Bank expects GDP growth to contract 1.9% this year (BarCap: -2.0%, EU/IMF: -2.0%) and 2.2% next (previous forecast: 1.9%, BarCap: -1.7%, EU/IMF: -1.8%).
FM Cavaco Silva had also warned that Portugal needs "tough and relentless budget discipline" adding that a failure to control public spending and introduce reforms might trigger the request of additional support, the FT reports this morning.
In September, the 'troika' (EU, ECB, IMF) identified a potential fiscal slippage of 1.3pp of GDP due in part to to the electoral cycle. Later, hidden debt in the Madeira region (worth 0.3% of GDP) was also disclosed.
In a note published earlier this week, we had flagged the risk of potential fiscal slippage in Portugal. According to our own seasonal adjustment, general government budget deficit data for H1 were off-track, suggesting a tracking budget deficit of 9.8% of GDP for this year (for more please see: Portugal: H1 national accounts fall behind 2011 budget deficit targets). We expect Portugal to reach a budget deficit of 6.3% and 5.0% of GDP this year and next.
Weak Domestic and External Demand
While we share the view that the main risk faced by public finances is related to potential weak GDP performance this year and next, we think that it refers more to 2012 than 2011. In fact, the government has already announced additional measures to tap the potential fiscal gap this year such as bringing forward the VAT rate increase on petrol prices and the re-direction of bank pension funds to the state social security system. For next year instead, the clouds of weak domestic and external demand are likely to cast a shadow on the Portuguese economy.
In fact, net exports have been the main contributor to real GDP growth over the past few years. A slowdown of growth in the economies of key trade partners could make it difficult for Portugal to contain the magnitude of the recession next year, implying significant downside risks to its public finances.
Portugal 10-Year Government Bond Yield
Italy 10-Year Government Bond Yield
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Greece 1-Year Government Bond Yield
The bond market does not think anything has been fixed in Europe and neither do I.
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