SCENARIOS-Weak euro zone states may not need aid

LISBON, May 10 (BestGrowthStock) – With their bonds strengthening
after the announcement of a $1 trillion financial safety net for
the euro zone, even the weakest states other than Greece may not
need to use the net, officials and analysts say. [ID:nSGE6490HH]

Countries are reluctant to apply for emergency aid partly
because it would come with tough requirements to impose
austerity measures, similar to those demanded in the
International Monetary Fund’s bailout programmes.

Here is the outlook for Portugal, Ireland and Spain, the
three countries which many analysts see as the next potential
“dominoes” after Greece.

PORTUGAL

Finance Minister Fernando Teixeira dos Santos said in
Brussels on Sunday night that it would be premature to decide
whether Portugal would need to apply for emergency funds.

Commerzbank economist Ralph Solveen said, “I wouldn’t say
the probability of Portugal needing to apply for the safety net
is high. If the ECB’s bond buying is successful and it calms
down the markets, I’d say it’s lower than 50 percent.

“The ECB is buying bonds and the pockets of the ECB are very
deep. Perhaps they will not need the bailout after all.”

Moody’s Investors Service last week put Portugal’s Aa2
rating on a three-month review for a possible downgrade, but
said that though Portugal’s financing costs might rise for some
time because of market pressures, it expected debt servicing to
“remain very affordable in the near to medium term”.

It said “the government’s debt is neither unsustainable nor
unbearable.”

Diego Iscaro, economist at IHS Global Insight in London,
said: “I don’t think Portugal has liquidity problems, so the
need to apply is surely below 50 percent. All depends on how
this aid will materialise, but I’d say the probability is about
20 percent in a 12-month horizon.”

He added, “If they choose aid at IMF terms, I think there
will be a lot of opposition, especially from the people, since
the economy is already performing poorly and unemployment is on
the rise.”

But Antonio Costa Pinto, a political scientist in Lisbon,
said that if the government did apply for the safety net, its
plan would probably be accepted by parliament, where the main
opposition party is on the centre-right of the spectrum.

“There will be some social polarisation, but from the
example of our direct agreements with the IMF in 1979 and 1983,
which had very tough conditions, I don’t expect too much
opposition. The levels of social conflict in Portugal are
relatively low.”

Portugal’s budget deficit is expected to drop from 9.4
percent of gross domestic product in 2009 to 8.5 percent this
year and 7.9 percent in 2011, the European Commission forecast
this month. Gross government debt is predicted to rise from 76.8
percent to 85.8 percent and 91.1 percent. [ID:nBRQ009230]
[ID:nBRQ009831]

IRELAND

Ireland has no immediate funding problems and sees no need
to use the safety net, the Finance Ministry said on Monday.

Finance Minister Brian Lenihan said his country’s fiscal
position was not questioned at the meeting of euro zone finance
ministers on Sunday.

“There’s no suggestion that any state other than Greece has
funding difficulties…There were no suggestions in the meeting
that Ireland has any difficulties whatsoever,” Lenihan told
national radio RTE, adding that he was under no pressure to draw
up an early budget.

Ireland could continue borrowing at current market rates
without seriously damaging its finances until the first half of
2011, according to Alan McQuaid, chief economist at Bloxham
Stockbrokers.

Asked about the chances of Ireland applying for a bailout in
the next 12 months, he said: “I would have it relatively low.
Obviously it depends on global conditions, but I would have it
relatively low, 25-30 percent.”

McQuaid said there was a recognition among public sector
workers that they did not want to go down the Greek route.

“I think there is an element, and you can see it here with
the public service unions and union leaders, there is a
recognition that you don’t want to go down the step where you
have to need recourse to the IMF.”

Retail sales, jobless, budget and Purchasing Managers Index
data last week offered signs that Ireland might be about to exit
the euro zone’s longest running recession.

“Last week was the best week for a long time on the Irish
economy data front,” Brian Devine, economist at NCB
Stockbrokers, said in a note. “The worry was that financial
contagion would spread and harm the recovery. The EU bailout
should ensure that this does not occur.”

Ireland’s budget deficit is due to shrink from 14.3 percent
of GDP last year to 11.7 percent this year, but edge up to 12.1
percent next year, according to the EC. Its government debt/GDP
ratio is expected to rise from 64.0 percent last year to 77.3
percent this year and 87.3 percent next year.

SPAIN

Spain says it has the necessary financing and access to
capital sources to avoid having to use the safety net.

“The Spanish government will not have to use this measure at
all; Spain’s deputy prime minister (and economy minister) Elena
Salgado was very clear about that yesterday,” a spokesman for
the economy ministry said.

Many analysts agree. “The pressure on Spain’s financing
costs is not enough to trigger this aid mechanism. Portugal’s
situation is more compromising, but the approval of the measures
dissipates the tension,” said Sara Balinas from Analistas
Financieras Internacionales.

The existence of the safety net should be enough to bolster
markets and this, combined with fresh cuts in the budget deficit
announced on Monday, should make any use of emergency funding
less likely, BNP analyst Luigi Speranza said. [ID:nMDT009015]

“The fact that the money is available is having a huge
impact on the market today; this in itself reduces the chances
that Spain will have to tap the extra financing.”

He added, “There has been considerable commitment from
institutions including the ECB. Now it’s really important to see
how markets take it…at the moment they are taking it very
well.”

Prime Minister Jose Luis Rodriguez Zapatero is expected to
give more details on the new deficit cuts — which would bring
the deficit to 9.3 percent of GDP in 2010 and 6.5 percent in
2011 — when he appears before parliament on Wednesday. Last
year the deficit was 11.2 percent.

Spain’s debt/GDP ratio is expected to climb from 53.2
percent last year to 64.9 percent this year and 72.5 percent
next year, the EC said last week, before the announcement of the
new deficit targets.

Stock Market Analysis

(Reporting by Jonathan Gleave, Andrei Khalip and Marei-Louise
Gumuchian; Editing by Andrew Torchia)

SCENARIOS-Weak euro zone states may not need aid