Portugal pledges debt cuts as borrowing costs soar

Portugal’s finance minister has vowed to take his country off the “platform” of Europe’s three most indebted economies to protect families and businesses from the impact of rising interest rates.

Fernando Medina said it was necessary to reduce the country’s public debt more quickly – the highest in the eurozone after Greece and Italy – to prevent rising government borrowing costs from affecting the broader economy.

“Faced with rising inflation, clear signs of a slowdown in Central and Eastern Europe and the prospect of higher interest rates, we cannot afford to introduce an additional risk factor,” he told foreign reporters.

Medina pledged to make debt reduction a “strategic goal” after sharply rising profit margins Government debt in the eurozone The European Central Bank is preparing to introduce an interest rate hike as early as July.

In separate meetings with foreign media and economists late last week, Medina stressed that debt relief would have a positive impact on banks, businesses and households at a time of global uncertainty caused by the war in Ukraine and supply chain bottlenecks in China.

His goal is supported by Mario Centeno, Governor of the Bank of Portugal, who at the same conference of economists referred to the International Monetary Fund’s forecast that Portugal’s public debt-to-GDP ratio would fall below that of France, Spain and Belgium by 2025. The path will determine the success of the Portuguese economy.

The government has not set specific debt targets yet this year, but the International Monetary Fund expects Portugal’s debt-to-GDP ratio to fall from 127.5 percent in 2021 to 104.5 percent by 2027.

Economists see reining in public spending as the biggest challenge, with Centeno warning that the significant increase in public sector hiring over the past two years cannot all be attributed to the pandemic. However, a large influx of recovery funds from the EU will significantly reduce the cost of public investment in the medium term.

After the delay caused by a Early elections In January, parliament is expected to give final approval this week to the government’s 2022 budget, which aims to bring the debt-to-GDP ratio down to 120.7 per cent. Centeno urged that debt reduction should remain one of the goals of the “next five budgets”.

In line with other EU countries, Portugal has seen its short-term debt yields turn from negative to positive in about two months. “Returns increased faster than expected,” said Philip Silva, chief investment officer at Banco Carregosa. In December, most analysts predicted that it would take a year for them to act as much as they had already.

The yield spread on Italian 10-year Treasuries against Germany, which is seen as a benchmark for economic and political risk in the eurozone, has risen to more than 200 basis points. Among the debt-burdened eurozone countries, Silva said, Portugal had succeeded in distancing itself from Italy. Its prevalence against Germany is around 120 basis points, which is close to that of Spain.

The Socialist government’s renewed determination to pursue fiscal prudence comes after years of steady progress in reducing public debt halted by the pandemic.

When Covid-19 hit, “the mountain of debt started to rise again,” Medina said. In 2020, the debt-to-GDP reached a record high of 135.2 percent.

The austerity measures that Portugal endured during the European sovereign debt crisis more than a decade ago have also cast a long shadow, making fiscal caution a top priority for many voters, according to polls, as well as politicians.

Medina’s debt-reducing ambitions have been bolstered by a robust recovery from the pandemic. The European Commission expects annual GDP growth of 5.8 percent this year, the highest rate in the European Union.

Lisbon also fully complies with the bloc’s agreements Deficit and Debt Rules The minister said he was determined to remain so, despite their suspension for another year.

“The target is positive, but we will need to see results,” Silva said. “The real test will be to rein in public spending.”

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