Portugal's economy will shrink as much as Greece's this year, according to IMF projections. The two will have identical current account deficits and the red ink in Portugal's budget will be almost as deep as in Greece's.

But there's also a huge difference: Lisbon enjoys political support that Athens can only dream of. Euro zone leaders seem determined that the slow-motion crash that is Greece will be a one-off, not a template for other strugglers.

So if Greece eventually succumbs to a disorderly default, spreading contagion, or if Portugal cannot re-enter the bond markets as planned in late 2013, Lisbon will be able to count on a second round of international aid on top of the 78 billion euro ($104 billion) rescue it received last May, many economists say.

I'm not saying Portugal is safe. They're not safe, said David Owen, chief European financial economist in London with Jefferies, an investment bank. Having said that, the goodwill is there. It's not a done deal, but it's almost certain that Portugal will get a second bailout.

Underscoring that goodwill, German Finance Minister Wolfgang Schaeuble said Berlin would be ready to tweak the loans-for-reforms deal that Lisbon is implementing under the tutelage of the International Monetary Fund and the European Union.

If there is a necessity for an adjustment of the Portuguese program, we will be ready to do that, Schaeuble was caught on camera assuring his Portuguese counterpart, Vitor Gaspar, in Brussels on Thursday.

Schaeuble suggested that German public opinion has lost trust in Athens, which was still holding out on Friday against the terms demanded for its own second bailout. By contrast, Chancellor Angela Merkel has described Lisbon's progress in reducing its budget deficit as very encouraging.

The IMF has given Portugal a positive interim report card, and EU leaders said on January 30 that both Portugal and Ireland - the third euro country on IMF/EU life support - were meeting their performance criteria; as long as they stayed the course, they could count on further support until they were able to rely on financial markets for funding again.


So does that mean policymakers can put aside worries that a Greek default might engulf not just Portugal and Ireland but also potentially Spain and Italy?

Steen Jakobsen, chief economist at Saxo Bank, said the mood in the euro zone had brightened simply because the European Central Bank had eased funding fears by providing banks with 489 billion euros in cheap three-year loans just before Christmas.

But Lisbon was fundamentally in the same dire straits as Athens. To put it simply, Portugal is where Greece was 12-14 months ago. It's the same scenario because the EU is buying time by continuing to throw liquidity at what is essentially a solvency issue, Jakobsen said.

He said Greece was likely to throw in the towel by May. At that point, Portugal would move into the markets' cross hairs unless Germany had already embraced the idea of standing behind other euro zone members' debts by issuing common euro bonds.

Nicholas Spiro, head of an eponymous sovereign strategy consultancy in London, is also skeptical. He frets that the success of the ECB's long-term refinancing operations is breeding complacency about the capacity to contain a Greek failure.

Portugal is almost certainly going to follow in Greece's footsteps, Spiro said.

The bond markets for sure are giving Portugal a thumbs down via implied borrowing costs. Ten-year yields are around 13.4 percent and spiked as high as 17.4 percent at the end of January after Standard & Poor's downgraded Portugal to junk status, forcing some investors to sell in keeping with their mandates.

Indeed, Spiro said policymakers would eventually have to force investors to write down their Portuguese bonds - even though they now acknowledge that insisting on similar writeoffs in Greece, dubbed private-sector involvement, undermined market confidence and would not be repeated.

Markets still perceive Greek PSI as a template, a foretaste, of what is to come in Ireland and Portugal, Spiro said. The key is how orderly it is.


Pessimism over Portugal's prospects is grounded in the country's economic fundamentals.

The IMF projects a return this year to a primary budget surplus - before interest payments - but, with the economy poised to contract 3.0 percent, government debt is set to rise to 116 percent of gross domestic product from 107 percent in 2011.

And, worryingly, even as a credit crunch deepens, Portugal has made a slower start than neighboring Spain in reducing a heavy private-sector debt load.

Household debt in Spain, at 82.7 percent of GDP, is 3.7 percentage points below its peak; in Portugal, where it is 94 percent of GDP, it is only 1 point off the 2009 high.

Spain has reduced corporate debt to 136 percent of GDP from 142.5 percent; in Portugal the total is unchanged at 130 percent, economist Gilles Moec at Deutsche Bank noted in a report. Portugal, he said, must stay on a very narrow path to ensure long-term debt sustainability.

On the plus side of the ledger, net foreign trade is improving and Lisbon is making much swifter progress than Greece on privatization, notably clinching the sale of stakes in two power companies to Chinese investors.

Furthermore, Owen at Jefferies said Portuguese banks' need for liquidity was no higher than it was in the middle of 2010 when bond yields first breached 7 percent.

A second ECB refinancing operation later this month, with an easing of collateral rules aimed at helping smaller banks, should provide extra support, he said.

Still, under the best of circumstances, the economic and fiscal challenge is momentous. To rise to the challenge, Portugal will need political and social cohesion. Here, economists are guardedly optimistic.

In contrast to the political squabbling and backsliding in Athens that is frustrating the EU, Portugal is governed by a coalition that was elected by voters fully aware that they would face years of austerity and structural reforms to improve Portugal's dismal competitiveness and productivity.

That gives Portugal a better chance of sticking to the terms of its bailout and, as Schaeuble's comments showed, retaining the support of its international creditors even if it does not regain the trust of the bond markets on time.

On the ground they recognize that reforms are necessary and they clearly want to stay in the system, Owen said. Portugal perceives that, inside the system, with financing, they'll eventually come through. ($1 = 0.7517 euros)

(Editing by Ruth Pitchford)