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Portugal PM Blames Speculation for Rise in Bond Yields

Peter Wise, Financial Times
Wednesday, 3 Nov 2010 | 8:58 AM ET

José Sócrates, Portugal’s prime minister, has blamed an increase in government bond yields on “speculative movements”, saying growing pressure on the country’s borrowing costs had no economic justification.

Portugal
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Portugal

His comments come shortly before a vote in parliament on Wednesday on an austerity budget designed to reassure financial markets that his minority government will meet ambitious deficit reduction targets.

Mr Sócrates told parliament that higher bond yields were affecting several peripheral eurozone countries, including Ireland, Greece and Spain, due to “speculative behavior that has no justification from an economic point of view”.

Yields on 10-year Portuguese government bonds climbed 14.4 basis points to 6.247 per cent on Tuesday, the highest level for almost a month.

Analysts attribute the pressure on Portuguese and Irish yields to a Franco-German proposal that would make bondholders share the cost of resolving any future Greek-style sovereign debt crisis.

Portugal is scheduled to issue a further €1 billion in government debt on Thursday in what Barclays Capital described as “a very tough market environment for the periphery”.

Mr Sócrates told parliament his tough austerity budget would move Portugal “out of the danger zone” of debt market turbulence.

Spending cuts, including a 5 percent reduction in public sector pay and a state pension freeze, would cut the budget deficit to 4.6 percent of gross domestic product in 2011 from a projected 7.3 percent this year, he said.

Approval of the budget has been assured by an 11th-hour agreement between the minority Socialist government and the opposition Social Democrats (PSD), who hold the balance of power in parliament.

Mr Sócrates said the deal had prevented “a budget crisis”, ensuring that Portugal was “better prepared to protect itself from the instability of financial markets”.

After a first vote on the general outline of the bill on Wednesday, parliament will debate the details of the proposals before a final vote scheduled for November 26.

Pedro Passos Coelho, the PSD leader, has instructed his party to abstain in the voting, averting a government defeat that would have forced Mr Sócrates to resign.

The PSD had pressed the government to ease planned tax increases by making bigger spending cuts.

Government concessions to the PSD involve a loss of €500 million in projected tax revenue.

Mr Sócrates said the shortfall would be covered by additional cuts in ministerial budgets, the sale of state-owned property and revenue from concessions to build small hydro power plants.

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