Portugal: Economy continues to shrink
July 29, 2011
Portugal remains deeply mired in recession. In June, industrial output declined 3.5% over the previous month (-2.9% year-on-year) suggesting that the economy remain in negative territory in the second quarter. On the upside, exports continued expanding for the 18th straight month in May. Against the backdrop of a weak economy, Moody's cut Portugal's long-term bond ratings from Baa1 to Ba2 with a negative outlook on 5 July, citing the increasing likelihood of a second bailout. According to the rating agency the country will not be able to borrow from the markets at sustainable interest rates from the second half of 2013 and will not achieve the deficit reduction target of 3% of GDP in 2013. . However, the rating agency may have to reconsider its assessment, as lending conditions improved for Portugal after the downgrade. According to the 21 July European Council agreement, Portugal will benefit from the same interest rate reductions and maturity extensions conceded to Greece. Interest rates will be lowered to 3.5% and maturities will be extended up to 30 years (up from the current 7.5 years). Moody's, S&P and Fitch acknowledged the positive impact of the new conditions for Portugal, but argued that the risk of future calls for concessions relating to private investors' debt remains. On the political front, the new government, led by Pedro Passos Coelho, took another step to meeting the requirements of the EUR 78 billion bailout and began to pursue labour reforms, which aim to reduce compensation entitlements for laid-off workers. According to the rescue package program, Portugal has committed to cutting the fiscal deficit to 5.9% of GDP by the end of this year, to 4.5% in 2012 and to 3.0% in 2013. The Central Bank reduced its growth outlook for the economy and now sees the economy contracting 2.0% this year and 1.8% in 2012 (March forecast, 2011: -1.4%, 2012: 0.3%). The government is even more pessimistic and expects the economy to shrink 2.3% this year and 1.7% in 2012.