As Ireland appears to be on the verge of resolving its debt crisis, the focus may now shift to yet another fiscally-troubled peripheral euro nation, Portugal.

The 10-year bond yields in Portugal are currently just under 7 percent, lower than comparable yields in Ireland and Greece, but still quite high and indicative of doubts over the country’s ability to cut its budget deficit.

Indeed, Portugal’s finance minister Fernando Teixeira dos Santos recently said while “there is a risk of contagion,” he doesn’t think his country will seek financial aid.

However, Portugal’s economy is slowing down and its central government deficit is climbing.

Lisbon expects that GDP growth in Portugal will slip to 0.2 percent in 2011, down from an estimated 1.3 percent this year. Also, in the first nine months, the central government’s deficit climbed by 2.3 percent from a year earlier (versus a decline of more than 40 percent in Spain and more than 30 percent in Greece).

Still, Emilie Gay, European economist at Capital Economics in London, believes Portugal is in far better shape than Ireland and may not need any loans, at least in the very near term.

She cites that the Portuguese banking sector is in a healthier position than its Irish counterparts.

“This is a key difference, given that the main purpose of the potential Irish rescue package would be to support the banking sector,” she said.

“In contrast, a retail-based model and the lack of a housing boom mean that Portugal has not yet needed to support its banks.”

Indeed, Portugal’s banks have a fairly low dependence on loans from the European Central Bank (ECB).
“This has fallen from its peak of 49-billion euros in August,” Gay explained.

“In contrast, Irish banks’ reliance rose further in October and is worth a greater share of GDP.”

In addition, Portugal boasts a healthier general fiscal position than Ireland.

Portugal’s public debt-to-GDP and budget deficit clock in at about 80 percent and 7.5 percent, respectively, among the lowest in the periphery this year.

“While Portugal’s immediate debt maturity schedule is heavier than the Irish equivalent, the Government has said that it has covered the vast bulk of its funding needs for this year,” Gay indicated.

However, she warns that if yields remain at the current 7 percent level, Portugal’s total financing needs next year will be “challenging.”

Portugal’s economy is performing a bit better than other peripheral economies, although growth is likely to slow next year due to fiscal tightening measures by the government.

“But the preliminary GDP release revealed that the economy expanded by 0.3 percent in the third quarter and is on track to expand by about 1.5 percent this year [versus the government’s 1.3 percent forecast],” Gay noted.

“In turn, this may help to improve the fiscal position through better-than-expected tax revenue.”

Finally, political tensions in Portugal appear to have subsided after the Government and the main opposition party agreed on steps needed to plug the 500-million euro gap in the 2011 budget.

While a general election due in January may yet lead to a change in the fiscal tightening plans, for now, the Budget is widely expected to pass the final parliamentary vote on 26 November,” Gay stated.

“In all, Portugal is in a better position than Ireland and we think it unlikely that it will be requesting funds in the very near future. But Portugal’s situation is still precarious and it will face new challenges
early next year. If markets turn to their next target then, Portugal may yet struggle without help.”