Portugal signals needs one more year to cut budget gap

LISBON Wed Feb 20, 2013 2:05pm GMT

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LISBON (Reuters) - Portugal will need one more year to meet the budget targets agreed under its 78 billion euro ($104 billion) bailout as the economic outlook has worsened, Finance Minister Vitor Gaspar signalled on Wednesday.

Several EU countries including France are expected to miss targets set by the European Commission on national deficits, though officials have indicated countries may be given leeway as long as they demonstrate progress with fiscal consolidation.

"It is reasonable to envisage that the European Commission will propose ... prolonging by one year the time given to Portugal to correct its excessive budget deficit," Gaspar told parliament.

A loosening of Portugal's budget deficit goals would mark the second time in two years that it has sought easier terms from its creditors as the deepest recession since the 1970s due to tough austerity undermines its ability to raise revenues.

Nevertheless, in a sign of investor demand for Portuguese debt, the country issued 12-month treasury bills on Wednesday at a yield of just 1.277 percent - below those of neighbouring Spain.

The government has stuck to a forecast of a 1 percent economic contraction this year, but most economists and the Bank of Portugal expect a deeper slump, largely due to lower foreign demand for exports, which have hitherto been a bright spot for the economy.

"The preliminary estimates point to a downward revision of economic activity of about one percentage point," Gaspar said.

Gaspar said a larger-than-expected slump in the fourth quarter of last year "will have a negative impact" on output this year.

The Bank of Portugal lowered its 2013 outlook in January to a downturn of 1.9 percent after last year's 3.2 percent slump.

Paula Carvalho, an economist at Banco BPI, said an extra year for Portugal to reduce its deficit "is a measure that aims to avoid a recessive spiral and could make it possible to return to growth earlier."

"This measure would give Portugal more leeway by alleviating the budget consolidation, allowing fiscal policy to act less as a break on economic activity," Carvalho said.

Portugal must cut its budget deficit to 4.5 percent of GDP this year from 5 percent last year. It had planned to further reduce the deficit to 2.5 percent of GDP in 2014, bringing it to within the EU's 3 percent limit.

The government has said it expects growth to start picking up in the second half of this year, and hopes to achieve meagre growth for all of 2014.

Still, Gaspar said it may be necessary to take additional budget measures equivalent to 0.5 percent of GDP during the next review of the economy by its creditors - the European Union and IMF - which starts on Monday.

The Portuguese already face the biggest tax hikes in living memory this year, which are set to take a toll on consumer demand. Unemployment is at record highs of just below 17 percent and is expected to continue rising this year.

The government faces further risks to its budget consolidation efforts from the country's Constitutional Court, which could upset elements of the tax hikes. Several opposition politicians and the country's president have lodged challenges against the tax moves with the court.

While Portugal's real economy remains stuck in a downturn, investors have been impressed by its reform efforts and have snapped up its bonds in the past year. Its 10-year bond yields have fallen to 6.2 percent now from over 17 percent a year ago.

Gaspar said that in 2012 "international financial market indicators of confidence and credibility benefited Portugal notably."

(Reporting by Axel Bugge and Sergio Goncalves; Editing by Hugh Lawson)

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