Portugal's PM Socrates seeks investor confidence

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A washing line outside a house in Lisbon
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As Europe frets over Greece, is Portugal being hung out to dry?

Amid mounting concern over debt problems in some European countries, the Portuguese government has announced plans to restore economic and financial confidence in the country.

Portugal's Prime Minister Jose Socrates said that he had agreed with the leader of the opposition to pull forward a set of austerity measures originally planned for 2011.

Portugal's stock market fell sharply on Wednesday morning, the day after rating agency Standard & Poor downgraded Portuguese government bonds two notches from A+ to A-.

The downgrade means that the rating agency is losing confidence in the Portuguese government's ability to meet its financial obligations. As a consequence interest rates for the country's bonds shot up, making it more expensive for the government to raise money on the international markets.

The situation on the Iberian peninsular is still a far cry from the troubles faced by Greece, but there is a risk that Greece's troubles could spread.

No 'credibility deficit'

However, while there are concerns over a possible spillover effect across southern Europe, Portugal does have an advantage. Greece is regarded with some suspicision internationally since it long misled the European Union about the true extent of its deficit.

Jonathan Loynes, chief European economist at Capital Management in London, says that Portugal does not suffer from the same "credibility deficit" as Greece. However, markets are becoming increasingly nervous about the country's prospects.

In Paris, French Budget Minister Francois Baroin vehemently defended the Portuguese position, saying: "The situation in Portugal is not the same as in Greece. The debt level is important but the Portuguese did not lie [about their finances]."

The latest available figures show Portugal's total government debt stood at roughly 77% of GDP at the end of 2009. This is quite similar to the numbers in countries such as France and Germany, two of Europe's economic powerhouses. However, Portugal's economy is significantly smaller in absolute terms and is not expected to revive any time soon.

While Europe is looking for a way to stabilise the situation in Greece, worries persist that other European countries, especially those in the south, may be in similar trouble.

Portugal's IMF option?

Prices for credit default swaps (CDS) on Portugal, in essence insurance against a national default, have been rising rapidly in April. The increase indicates that those offering these CDSs believe a default is becoming more likely.

Mr Loynes says that Portugal will be facing similar challenges to other southern European nations. "Since joining the single currency [the euro] they've been dealing with some pretty serious competition issues. Costs and wages have been going up ever since they joined."

So might Portugal end up going to the IMF as well? Portugal is facing a series of debt repayments over coming months. Crucially the coutry might also be required to help out Greece as part of a European bail out effort.

Mr Loynes says: "Portugal might well find itself in a situation where it has to borrow money on the international markets at 5.25% interest and then pass it on to Greece at 5%... they might well be tempted to turn to the IMF as well."