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Portugal winning at soccer, but its economy may be fighting a losing game

Scenes of celebration spread across Portugal this weekend as the country's soccer team emerged victorious from the Euro 2016 tournament. But, should the nation turn its attention back to its economy, the smiles might fade.

Portugal, according to a Barclays note Monday, is, "struggling with a systemic banking crisis, the lack of a convincing medium-term fiscal plan and excessive public and private sector leverage."

Bruno Alves, Ricardo Quaresma, Pepe, Cristiano Ronaldo, Coupe Henri Delaunay, Joao Moutinho, Andre Gomes and Joao Mario celebrate winning the UEFA EURO 2016 final match between Portugal and France at the Stade de France in Paris.
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Bruno Alves, Ricardo Quaresma, Pepe, Cristiano Ronaldo, Coupe Henri Delaunay, Joao Moutinho, Andre Gomes and Joao Mario celebrate winning the UEFA EURO 2016 final match between Portugal and France at the Stade de France in Paris.

Barclays expects Portuguese growth to slide post-Brexit, from an expected 0.7 percent in 2016 to just 0.3 percent in 2017. According to the European Commission, Portuguese GDP (gross domestic product) grew by 1.5 percent in 2015.

Barclays predicts the total capital needs for Portuguese banks to be at 7.5 billion euros ($8.3 billion), including roughly 5 billion euros for state-owned Caixa Geral, the country's second largest bank.

Other financial data are equally downbeat, as, for example, Barclays forecasts Portugal's deficit to fall only by a small margin, to 4.1 percent of GDP from 4.4 percent in 2015. The country's public debt tells a similar story, as Barclays predicts it to increase from 130 percent of GDP in 2015 to roughly 132 percent in 2016, remaining above 130 percent throughout the next decade.

Barclays also predicts that Portugal will require 8.9 billion euros of funding for the rest of 2016, with annual borrowing averaging at 23.4 billion euros for 2017 to 2020.

But, according to the Barclays note, published by a team of analysts led by Antonio Garcia Pascual, the government's inability so far to implement a realistic medium-term fiscal plan compatible with solvency is most pressing.

The bank believes that the government can establish a primary fiscal balance slightly above 1 percent of GDP over the medium term, which would be sufficient for stable debt dynamics. But, "even moderate shocks to the medium-term growth or fiscal parameters would place the debt-to-GDP ratio on an ever-increasing path," the note advises.

Barclays, in the note, appreciates that its predictions rely on the European Central Bank continuing its program of quantitative easing, and that the DBRS credit ratings agency does not downgrade Portugal.

Also, Barclays recognized that Portugal's potential for crisis was not entirely reliant on its own economic management, suggesting that an equivalent crisis in Italy or Spain could negatively impact the country.

Portugal emerged from a two and a half year recession in August 2014, though its economy has been rocky since.

However, speaking to CNBC last month, Portuguese Economy Minister Manuel Caldeira Cabral remained optimistic, saying, "I think that the system is stabilizing … we are very focused on the growth of our economy and the reforms we are implementing have to do with growth."

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