Euro zone hit by Portuguese deficit, Irish banks

Saturday, 2 April 2011 00:00 - - {{hitsCtrl.values.hits}}

Reuters - Portugal revealed on that its budget deficit had ballooned above target and Ireland said its banks needed 24 billion euros in extra capital, shaking euro zone markets and deepening the bloc’s debt crisis.

European leaders had hoped a package of anti-crisis measures agreed at a Brussels summit last week would help draw a line under the woes that have plagued the 17-nation currency area for over a year, forcing bailouts of Greece and Ireland.

But volatile developments showed why the bloc is likely to remain under pressure for some time, even if many investors have turned their attention in recent weeks to the conflict in Libya and nuclear disaster in Japan.

In an echo of the Greek deficit revision in late 2009 that first stoked market concerns about euro zone finances, Portugal presented new figures showing its 2010 budget deficit totalled 8.6 percent of gross domestic product (GDP), more than a full point above the 7.3 percent the government had been targeting.

Lisbon said the upward revision was due to a simple accounting change demanded by Europe’s statistics agency rather than any attempt to deceive, but bond markets responded by pushing the yields on Portuguese bonds to new euro-era highs.

“These (revisions) are very much one-off factors and don’t have a bearing on the deficit for next year,” said James Nixon, European economist at Societe Generale. “That doesn’t mean to say there shouldn’t be a funeral march for Portugal. Funding is untenable given where yields are.”

Portugal had been under intense pressure to seek financial assistance from the EU and IMF even before Prime Minister Jose Socrates stepped down last week following the rejection of his latest budget cuts by parliament.

On Thursday, President Anibal Cavaco Silva dissolved parliament and set a June 5 date for a snap general election, meaning two more months of political uncertainty when the country can least afford it.