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Portugal faces Greek fallout on eve of creditor visit

Published on 14/09/2011

Portugal must avoid letting a looming default by Greece sink its own debt-crisis fight, the government said on Wednesday, just as creditors were to pore over a 2012 budget to ensure bailout conditions were being met.

A similar team of creditors from the European Union and International Monetary Fund cut short a visit to Athens last week, calling for more progress by Greek authorities to meet rescue conditions — a move that has caused deep market turmoil and angst across the eurozone.

To avoid similar drama, centre-right Prime Minister Pedro Passos promises to broaden reforms in Portugal, the third country to have received a bailout by the EU and IMF after Greece and Ireland.

Portugal has already passed a wave of reforms including a hike in transport prices, increased taxes on gas and electricity and cutbacks in the public work force.

However the troika of creditors, which includes the European Central Bank, has warned that Lisbon must still “reinforce controls and reduce waste”.

The warning came as Portugal admitted it had miscounted its public coffers by almost two billion euros ($2.74 billion).

The IMF is pushing for new reforms that include a rise in the country’s value-added-tax and a reduction in corporate taxes to increase Portugal’s competitivity and its ability to attract foreign investors.

But now, with international markets already factoring in a default by Greece into investments, external factors bring a new wave of challenges to Portugal’s leaders.

Greece could “slow down and complicate the changes we have already begun,” the prime minister said recently.

Economist Joao Duque warned a default by Greece would cause an “explosion” in the cost of Portugal’s debt with investors persuaded more than ever that Lisbon would be unable to repay its debt.

Passos said that “faced with this challenge” the country must concentrate on the task at hand “so that everyone understands that no matter what happens outside, Portugal is implementing its programme successfully”.

In a report published Tuesday, the finance ministry reaassured the country would “take whatever measures necessary” to satisfy its creditors and investors.

But nationalising Portuguese banks would not be one of those measures, the governor of the Portugal’s Central Bank said on Wednesday.

Even if lenders must turn to European Union rescue funds for aid, Portugal “will not change the share structure of banks,” Carlos Costa told business daily Jornal de Nogocias.

“As long as I am governor, it will not be possible to have a model where the state sidesteps private shareholders and leads to the nationalisation of banks,” the governor said.

He said it will be up to the bank themselves to make a strategic decision of accepting or not EU help, offered as part of the bailout package.