WSJ: Portugal Hints at Deficit Revision

MARKETS|MARCH 30, 2011
Portugal Hints at Deficit Revision

By PATRICIA KOWSMANN

LISBON—Portugal's statistics agency said it plans to make "accounting changes" in a report to be submitted to the European Union's statistics agency by week's end, a revision that could indicate a wider 2010 budget deficit and which would further undermine the credibility of the country's embattled government.

The country's statistics office has been reviewing its 2010 accounts after the EU's Eurostat agency observed that Portugal hadn't included a €2 billion ($2.8 billion) cash injection into Banco Portugues de Negocios.

A spokeswoman from Portugal's statistics agency confirmed Tuesday that "a new set of accounting changes" will be made in a report to Eurostat. The EU agency will then publish the amended bookkeeping next month.‬

A revision showing a wider deficit could imperil Portugal's effort to assure investors that it can continue to finance itself without joining Greece and Ireland in asking for a bailout from the EU and the International Monetary Fund.

Ratings agency Standard & Poor's on Tuesday delivered a harsh critique of the euro zone's new plans for resolving its sovereign debt crises, downgrading euro-zone members Portugal and Greece.

It cut Portugal's senior debt rating by one notch to triple-B-minus from triple B. It had only last week downgraded Portugal by two notches, and the country is now on the verge of losing its investment-grade status for the first time.

S&P also pushed its rating of Greek sovereign debt down further into junk territory, cutting it by two notches to double-B-minus from double-B-plus. The agency cited fears that the two countries may have to restructure their debt and force losses on bond holders after 2013.

The outlook for both countries' ratings remains negative, S&P said.

Portugal's political and financial turbulence were at the forefront of a summit of EU leaders in Brussels last week, where Prime Minister José Sócrates reiterated that the country will meet budget targets regardless of who forms the government.

Mr. Sócrates tendered his resignation last week after legislators rejected a new package of budget cuts that European policy makers had urged on his government. Early elections are likely to be called for late May or early June, with Mr. Sócrates staying on as a caretaker prime minister until then.

At risk now are the Portuguese government's expectations that the budget deficit for 2010 had been below its targeted 7.3% of gross domestic product. A person familiar with the accounts said if costs associated with Banco Portugues de Negocios are included, Portugal's budget gap for 2010 would then come above 8% of GDP.

The government could also have to recast about €500 million in loans to loss-making mass-transport companies, which are threatened with default and shouldn't be regarded as assets, according to the person.

The cost of insuring Portuguese sovereign debt against default continued to edge higher Tuesday after the S&P downgrade.

Portugal's government looks likely to run out of money within the next three months, according to bond-market analysts. It has enough cash to repay bonds that mature in April, but not those that mature in June.

"Any problems with budget numbers are pretty bad news for a country already under pressure," said Barclays Capital analyst Antonio Garcia Pascual.

The example of Ireland could provide an idea of what happens next in terms of budget calculations.

In April of last year, when Eurostat published its first estimate of Ireland's budget deficit for 2009, it calculated a shortfall of 14.3%, above the government's figure of a budget gap representing 11.8% of GDP.

The reason for the higher deficit estimate was that the government had injected €4 billion of capital into the ailing Anglo-Irish Bank, and Eurostat said that should be added to the deficit.

The Portuguese government has said the miscalculation was the result of a change in EU accounting rules. Finance Minister Fernando Teixeira dos Santos acknowledged in Parliament last week that changes will have to be made in the budget accounting, which "will inevitably affect the results for 2010."

The minister blamed new rules imposed by Eurostat. "This is the same as changing the score after the match is over," Mr. Teixeira dos Santos said.

A Eurostat spokesman declined to comment on Portugal specifically, but referred to a guidance note published on its website on March 16 on how governments should account for impaired assets.

"Eurostat is preparing the 2011 spring notification of government debt and deficit data and is discussing specific national issues with each of the national statistical institutes of the member states," he added.

The notification will be released April 26.

European policy makers have given Portugal and other highly indebted countries until 2013 to lower their budget deficits to the 3%-of-GDP limit set for euro zone members. The country must also cut its budget deficit to 4.6% of GDP this year.

After Standard & Poor's and Fitch Ratings both cut Portugal's debt, the country's already-high funding costs continued to inch toward unsustainable levels. Yield spreads on 10-year Portuguese debt are now 469.8 basis points over benchmark German bunds at 7.994%.

Adding on to pressures, Portugal's central bank on Tuesday cut its economic growth forecasts for this and next year, and said substantial measures will be needed to meet the government's deficit-reduction goals.

The Bank of Portugal said it now expects GDP to contract this year by 1.4%, more than the 1.3% contraction it forecast earlier. The central bank also cut its GDP growth forecast for 2012 to 0.3% from 0.6% previously, partly because of the effects of the government's deficit-cutting measures.

Write to Patricia Kowsmann at patricia.kowsmann@dowjones.com

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