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Portugal Playing Politics with EU Money?

Portugal is at a crossroads that will determine whether it needs to go cap in hand to the European Union's rescue fund for support, according to Barclays Capital.

AP

Portugal’s minority government could fail Wednesday as the Parliament in Lisbon votes on a controversial fourth Stability and Growth Program.

There is a chance that the main opposition party will still agree a compromise that would mean the current prime minister, José Socrates, from resignation, said Laurent Fransolet, the head of European interest rates strategy at Barclays.

If they don’t, Fransolet predicts the new government might be more open to an EU bailout than the current administration.

"If spreads do not compress sufficiently in the coming months, focus may turn again to the need for a bailout," he said. "At the same time, a bailout may not be a negative from the point of view of the opposition (PSD), as the 'loss of political capital' that could be associated with an EU/IMF bailout would largely be paid by the current government."

"It is possible that the opposition could strategically wait for a program before stepping up its election efforts," Fransolet said.

Higher Growth Needed Portugal’s main problem is a lack of productivity and its knock-on effect on growth, he said.

"We believe that at the core of Portugal's economic troubles lies its low productivity growth," Fransolet added. "Without a strong structural reform agenda, in our view, it is very unlikely that Portugal can grow out of its indebtedness."

"Increasing competitiveness and flexibility in highly regulated product, service, and labor markets is needed for higher investment and growth; and growth is needed to place the debt/GDP on a downward trajectory," Fransolet said.

Barclays Capital predicts Portugal’s debt to GDP ratio will hit 100 percent by 2014 without structural reforms and said even if austerity measures are delivered debt will fail to stabilize.

But Fransolet is confident Portugal can meet its short-term financing needs.

"While it is always difficult to know the precise cash position of a large entity such as a government, given what the Portuguese treasury has issued and the (good) budget execution in the first two months of the 2011, we believe the Treasury probably has enough cash already to face the mid April redemption of 4.3 billion euros and likely the cash deficit in May as well,” he said.

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