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Portugal's prime minister says financial aid not necessary.

Summary: LISBON: Portugal's leaders attempted Tuesday to quash persistent talk they would seek an international bailout, but one Central Bank official broke ranks to say the country would be better accepting outside help. Finance Minister Fernando Teixeira dos Santos said there were no plans to seek aid and Prime Minister Jose Socrates added at a news conference

Shrikesh Laxmidas and Daniel Alvarenga

Reuters

LISBON: Portugal's leaders attempted Tuesday to quash persistent talk they would seek an international bailout, but one Central Bank official broke ranks to say the country would be better accepting outside help.

Finance Minister Fernando Teixeira dos Santos said there were no plans to seek aid and Prime Minister Jose Socrates added at a news conference that Lisbon had beaten its goal for reduction of the 2010 budget deficit.

The premiums for buying Portuguese debt over low risk German Bunds fell, with traders citing European Central Bank buying, ahead of a sale Wednesday that economists have said could tip the balance in its battle to avoid a bailout.

Socrates cited preliminary data as showing the budget deficit had ended 2010 below a target of 7.3 percent of gross domestic product (G.D.P.) promised to Brussels, meaning it had cut the deficit by more than 2 percentage points from 2009's highs.

"The country is doing its work and is doing it well C* Portugal is one of the countries in Europe that cut its deficit most in 2010," Socrates told reporters. "I'd like to point out that the Portuguese government and Portugal will not ask for any aid or financial assistance for the simple reason that it is not necessary."

Portugal is widely seen as the country most likely to follow Greece and Ireland in seeking international support in a deepening euro zone debt crisis.

Analysts said the budget news was positive, but questioned the impact of the deficit reduction, given Portugal's weak economic growth prospects.

"Our conclusion is that the prospective release of a budget deficit of around 7 percent of G.D.P. for 2010 would, on the face of things be good news," analysts at Barclays Capital said in a note.

Central Bank board member, Teodora Cardoso, was quoted as saying Monday that Lisbon would do better to seek international financing, breaking ranks with political leaders.

"It would be easier if we had foreign help because this would mean that the adjustment would not be so abrupt, but if we do it alone, for the markets to believe in it, it has to be brutal," Cardoso said according to news agency Lusa.

Many economists say the austerity drive will lead Portugal into a new recession, even though the government expects export growth to lead to a modest 0.2 percent G.D.P. growth.

Analysts from Barclays said the contraction may have begun already.

"The impact of the fiscal tightening on G.D.P. is likely to be substantial," the bank's analysts said in a note.

"Indeed, based on recent data for industrial production, construction output and retail sales C* our expectation that real G.D.P. contracted in the fourth quarter by around 0.4 percent [quarter-on-quarter] is being borne out."

Filipe Garcia, head of Informacao de Mercados Financeiros consultants in Porto, said the news of a lower deficit was welcome but would have little impact "as Portugal's fate has been out of its own hands for some time and even it the deficit was three or 4 percent it would not change the situation."

Socrates said the country would keep financing itself in markets and was confident about Wednesday's bond offering of up to 1.25 billion euros (around $1.61 billion). "This placement is going to run well," he said.

Calling the deficit reduction, "an excellent result for Portugal", Socrates said that higher-than-expected revenues and more controlled spending created budget leeway of 800 million euros, or 0.5 percent of G.D.P. last year.

This year's target is even more ambitious as the government plans to slash the deficit to 4.6 percent of G.D.P. after adopting a range of painful austerity measures such as wage cuts for civil servants and higher taxes.

The premium investors demand to hold Portugal's benchmark 10-year bonds compared to German bunds fell basis points, with traders citing European Central Bank buying.

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Publication:The Daily Star (Beirut, Lebanon)
Geographic Code:4EUPR
Date:Jan 12, 2011
Words:736
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