PARIS (MNI) – The Portuguese economy is likely to continue
contracting in 2012 after a 1.4% decline in GDP this year, once new
budget cutting measures are adopted and implemented, the Bank of
Portugal said in its Economic Bulletin, published Tuesday.

The bank’s official spring forecast actually showed Portuguese GDP
eking out a slim 0.3% gain next year after -1.4% in 2011, but the
bulletin noted that the forecasts included neither additional
deleveraging of the economy nor the impact of significant new measures
that would be needed to continue cutting the public deficit.

“In 2012, the ensemble of permanent new measures needed to reach
the [deficit reduction] objective taken on by the authorities is of a
very substantial dimension,” the bank said. “The adoption of these
measures implies a new, significant contraction of economic activity
similar to what is projected for 2011.”

Moreover, the forecasts published today “do not yet consider the
inevitable process of deleveraging in the private sector, including the
banking system,” the central bank added. It noted that the precise
process of bank restructuring would be decided in the coming months, but
whatever the details, it will “imply a significant change in financing
conditions and increase in the respective degree of restrictiveness,
creating additional downward risks for economic activity.”

The spring forecasts are “particularly conditional” on these
dynamics, the bank continued. Both the budget cuts and deleveraging yet
to come are “essential to promote and effective adjustment of external
financing needs,” it said.

Portugal will need to redeem E4.34 billion worth of bonds on April
15, in addition to making a coupon payment of E710 million. On June 15,
it faces a redemption of E4.93 billion and has a coupon payment of E2.02
billion due around the same time.

With market interest rates on Portuguese debt soaring far above
what is considered sustainable, many analysts and market professionals
worry that Lisbon will not be able to refinance itself affordably. The
rate on five-year Portuguese debt is an astronomical 8.56%, while
ten-year paper is at 7.84% — 463 basis points above the benchmark
German Bund. The Portuguese government itself has said that it cannot
sustain financing at rates above 7%.

Given these dynamics, speculation has grown in recent days that
Portugal will have to request aid from the European Financial Stability
Facility and the International Monetary Fund, and Lisbon has been under
increasing public pressure to do so. Portuguese officials, however,
continue to insist that they can make it on their own.

The resignation last Wednesday of Prime Minister Jose Socrates,
after the opposition parties in parliament defeated a new package of
austerity measures, has only intensified the speculation of an aid
package for Portugal. Ironically, however, the country will not be in a
position to negotiate one until it has a new government with a mandate
to do so.

President Anibal Cavaco Silva is widely expected on Friday to
announce an election date following a high-level meeting on Thursday.
Portuguese media reports put the date on either May 29 or June 5.

Meanwhile, economic activity continues to shrink. The Bank of
Portugal forecasts — always subject to the caveat of new budget
measures, which militate even more sharply downward — show internal
demand, investment and consumption — both private and public — all
contracting this year and next. Exports, by contrast are expected to
expand sharply as external demand remains robust.

The bank puts Portugal’s HICP inflation rate at 3.6% this year,
dropping back to 2.0% in 2012 as the spike in energy prices wanes —
according to their forecast assumptions.

GDP risks are strongly on the downside, while inflation risks are
balanced, all in the context of “abnormally elevated uncertainty,” the
bank said

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