Portugal’s finance minister has pledged to remove his country from the “podium” of Europe’s three most indebted economies to protect families and businesses from the impact of rising interest rates.
Fernando Medina said faster reductions in the country’s public debt – the highest in the eurozone after Greece and Italy – were vital to prevent rising government borrowing costs from hitting the EU. whole economy.
“With rising inflation, clear signs of a slowdown in Central and Eastern Europe and the prospect of higher interest rates, we cannot afford to introduce an additional risk factor,” he told foreign reporters.
Medina’s pledge to make debt reduction a ‘strategic objective’ follows a sharp rise in eurozone government debt spreads as the European Central Bank prepares to introduce interest rate hikes from July.
In separate meetings with foreign media and economists late last week, Medina stressed that easing the debt burden would have a positive impact on banks, businesses and families at a time of uncertainty. caused by the war in Ukraine and supply chain bottlenecks in China.
His goal is backed by Mário Centeno, Governor of the Bank of Portugal, who at the same conference of economists cited IMF projections that Portugal’s public debt-to-GDP ratio would fall below those of France. , Spain and Belgium by 2025. trajectory will determine the success of the Portuguese economy,” said Centeno.
The government hasn’t set specific debt targets beyond this year, but the IMF projects Portugal’s debt-to-GDP ratio could fall from 127.5% in 2021 to 104.5% by 2020. here 2027.
Economists see containing public spending as the biggest challenge, with Centeno warning that a sharp increase in public sector hiring over the past two years could not be entirely attributed to the pandemic. However, a large influx of EU recovery funds will significantly reduce the cost of public investments in the medium term.
After delays caused by a snap election in January, parliament is expected to give final approval this week to the government’s 2022 budget, which targets a drop in the debt-to-GDP ratio to 120.7%. Debt reduction should remain a goal for “the next five budgets”, urged Centeno.
Like other EU countries, Portugal saw yields on its short-term debt turn from negative to positive in about two months. “Yields rose faster than expected,” said Filipe Silva, chief investment officer at Banco Carregosa. “In December, most analysts expected it to take them a year to move as much as they have already.”
Italy’s 10-year yield spread over Germany, seen as a benchmark for economic and political risks in the euro zone, climbed above 200 basis points. Among highly indebted eurozone countries, however, Portugal managed to stand out from Italy, Silva said. Its spread against Germany is around 120bp, close to that of Spain.
The renewed determination of the Socialist Party (PS) government to continue fiscal prudence comes after years of steady progress in reducing public debt were interrupted by the pandemic.
When Covid-19 hit, “the mountain of debt started to rise again,” Medina said. In 2020, the debt-to-GDP ratio reached a record high of 135.2%.
The austerity measures that Portugal endured during the European sovereign debt crisis more than a decade ago also cast a long shadow, making fiscal prudence a high priority for many voters, according to polls from opinion, as well as for politicians.
Medina’s debt reduction ambitions have been supported by a strong recovery from the pandemic. The European Commission predicts annual GDP growth of 5.8% this year, the highest in the EU.
Lisbon is also fully abiding by the bloc’s deficit and debt rules and is determined to remain so, the minister said, even if they have been suspended for another year.
“The objective is positive, but we will have to see the results,” Silva said. “The real test will be to contain public spending.”