Portugal to need “debt haircut” as economy tips into Grecian downward spiral

Thursday, January 19, 2012
By Paul Martin

Portugal’s borrowing costs have jumped to record highs and are tracking the moves seen in the culminating phase of Greece’s debt crisis, dashing hopes that the country will be able to stave off contagion by embracing drastic austerity.

By Ambrose Evans-Pritchard
19 Jan 2012

Yields on Portugal’s 10-year bonds climbed to 14.39pc on Thursday. Credit default swaps measuring bond risk have reached 1270 points, pricing a two-thirds chance of default over the next five years.

While some of the latest damage reflects forced selling of Portuguese debt after Standard & Poor’s cut the country’s credit rating to junk status last Friday, there are deeper worries that sharp fiscal cuts by the free-market government of Pedro Passos Coelho may prove self-defeating.

Mr Passos Coelho has been praised by EU leaders and the International Monetary Fund for delivering on austerity, but the risk is that severe tightening – without offsetting monetary and exchange stimulus – will push Portugal into the same downward spiral that has already engulfed Greece.

Jurgen Michels, Europe economist at Citigroup, said Portugal’s economy will contract by a further 5.8pc this year and by 3.7pc in 2013, a far sharper decline than official forecasts. The peak-to-trough collapse would be 13pc, a full-fledged depression.

“As this gets worse it is going to be extremely difficult to go ahead with more austerity measures: political contagion will start to come through,” he said.

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