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Pressure Mounts on Portugal

A man walks past an office of Portuguese bank Banco Espirito Santo (BES) in Lisbon August 4, 2014. Portugal's central bank said on Sunday it decided to rescue troubled lender Banco Espirito Santo in a 4.9 billion euro ($6.6 billion) recapitalisation to be pumped into the healthy part of the bank that will be separated from its compromised assets. The money comes mostly from the country's international bailout, which had a 6.4 billion euro ($8.6 billion) line available for bank recapitalisation, via a bank resolution fund set up by Portugal in 2012, Costa said. REUTERS/Hugo Correia (PORTUGAL - Tags: BUSINESS POLITICS)
Portugal's economy is struggling again.
  • Why it matters

    Why it matters

    After some optimism over the last two years, the Portuguese economy is back in trouble, with weak banks and rising public and private debt. Another bailout seems on the cards.

  • Facts

    Facts

    • Portuguese growth slowed over the first two quarters of 2016, making it unlikely that it will reach its GDP growth target of 1.8 percent.
    • The center-left Portuguese government has promised its E.U. partners to bring its deficit under 2.5 percent this year, but slower growth makes this unlikely.
    • Portugal completed a three-year bailout program in 2014, during which the previous center-right government introduced austerity measures to cut the budget deficit.
  • Audio

    Audio

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It is exactly two years since Portugal exited the European Union bailout program. But after a period of promising recovery, the country’s economy is again deteriorating. The government in Lisbon is struggling with a mixture of high taxes, low growth, and unstable banks.

That explosive mixture is making investors nervous. Last week, Fergus McCormick, sovereign bond expert at the ratings agency DBRS, set off panic selling of Portuguese debt when he said in an interview that low growth figures in the second quarter had “raised our concerns about growth prospects, which appear to be slowing into the third quarter.” In response, yields on 10-year bonds leaped up 13 basis points, their biggest jump since June’s Brexit vote. Pressure continued all week.

Of course, Mr. McCormick was only making explicit what everyone already knew. But the DBRS agency has particular significance for Portugal: it is the only rating agency which still rates the country’s debt as “investment grade.” And that rating is the precondition for the bonds to be eligible for the European Central Bank’s bond buying program. If the ECB were to stop buying Portuguese bonds, the country would face considerable problems in financing its debt.

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