Bank of Portugal Says More Austerity Measures Needed

The Bank of Portugal warned on Tuesday of the need for substantial new austerity measures to ensure the debt-laden country meets budget goals, set to deepen an expected economic contraction.

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The warning adds pressure on Lisbon following the minority government's resignation last week after the opposition rejected its austerity plan in parliament, prompting many economists to predict the country will need a bailout soon like Greece and Ireland.

In its spring economic report, the Bank of Portugal said there were risks of the country missing budget goals this year, adding that in 2012 the pressure for more measures could be greater.

"In 2012 the additional, permanent measures necessary to reach the goal promised by the authorities reach a very substantial size," the bank said.

The report forecast economic contraction of 1.4 percent this year and growth of 0.3 percent in 2012 but it said those projections did not include likely additional austerity measures and deleveraging in the economy.

Last year the economy grew an estimated 1.4 percent.

"As stated, the necessity of additional budget consolidation measures and the process of deleveraging should lead to a significant reduction in the economic growth rate relative to current projections, especially in 2012," it said.

"The Portuguese economy is not set to accompany the economic recovery in Europe, although it should benefit from external demand," it said.

Last week parliament rejected government austerity measures, including a levy on pensions and cuts in health spending, triggering the resignation of the prime minister.

President Anibal Cavaco Silva is expected to set later this week a date for a snap election, probably in late May or early June.

Portuguese bond yields are trading around euro lifetime highs on fears over the country's public finances.

The Socialist minority government has promised Brussels to cut the budget deficit to 4.6 percent of GDP this year, down from around 7 percent in 2010.

Next year it is aiming to reduce the deficit further to 3 percent of GDP.

A series of four austerity plans introduced in Portugal since the start of the global economic crisis have progressively tightened the economic screws, with tax rises across the board and cuts in civil servants' pay.