Portugal pledges to cut debt as borrowing costs rise

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

Fernando Medina said the country’s public debt – the highest in the euro zone after Greece and Italy – must be reduced faster to prevent rising government borrowing costs from taking a toll on the wider economy. shock.

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

Medina promises debt relief as ‘strategic objective’ after sharp rise in debt spreads Eurozone government debt As the European Central Bank prepares to raise interest rates as early as July.

In a separate meeting with foreign media and economists late last week, Medina stressed that easing debt burdens will have implications for banks, companies and households amid global uncertainty caused by the war in Ukraine and bottlenecks in Chinese supply chains. positive influence.

His goal was backed by Portuguese Bank President Mario Centeno, who at the same meeting of economists cited the International Monetary Fund’s forecast that Portugal’s public debt-to-GDP ratio would fall by 20% by 2025. Below the levels of France, Spain and Belgium. “This trajectory will determine the success of the Portuguese economy,” Centeno said.

The government has not set a specific debt target beyond this year, but the IMF expects Portugal’s debt-to-GDP ratio could fall from 127.5% in 2021 to 104.5% in 2027.

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

after delay quick election In January, parliament is expected to give final approval this week to the government’s 2022 budget, which aims to reduce the debt-to-GDP ratio to 120.7%. Debt reduction should remain the goal of the “next five budgets”, Centeno urged.

Like other EU countries, Portugal’s short-term debt yields turned from negative to positive in about two months. “Yields are growing faster than expected,” said Filipe Silva, investment director at Banco Carregosa. “In December, most analysts expected it would take them a year to get to where they are now.”

Italy’s 10-year bond yield spread over Germany, seen as a benchmark for economic and political risk in the euro zone, has climbed above 200 basis points. Among the heavily indebted euro zone countries, however, Portugal has managed to distance itself from Italy, Silva said. Its spread over Germany is around 120 basis points, close to Spain.

The Socialist (PS) government has renewed its resolve to pursue fiscal prudence after years of steady progress in reducing public debt was interrupted by the pandemic.

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

Portugal’s austerity measures during Europe’s sovereign debt crisis more than a decade ago also cast a long shadow, making fiscal prudence a priority for many voters and politicians, according to opinion polls and politicians.

Medina’s debt-reduction ambitions have been bolstered by a strong recovery from the pandemic. The European Commission forecasts an annual GDP growth rate of 5.8% this year, the highest in the EU.

Lisbon also fully complies with the EU’s Deficit and Debt Rules The minister said he was determined to continue doing so, even though they had been suspended for a year.

“The goals are positive, but we need to see results,” Silva said. “The real test will be to suppress public spending.”

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