UPDATE 3-ECB’s Constancio "relatively pessimistic" on Portugal

* Imperative need to cut budget deficit

* Believes deficit can be fixed in long-term

* Government rules out tax hike

* Minister says Greece comparisons unfair, unease can spread

(Adds finance minister, updates spreads)

By Sergio Goncalves and Shrikesh Laxmidas

LISBON, Feb 2 (BestGrowthStock) – Portugal needs to make significant
economic adjustments to reduce its budget deficit, Bank of
Portugal governor Vitor Constancio said on Tuesday, adding he
was relatively pessimistic about the short-term outlook.

Portugal’s deteriorating public finances have come into
focus in recent weeks in the wake of debt problems for fellow
euro zone member Greece. The country’s bonds have been hit by
these concerns and spreads widened again on Tuesday.

Constancio, who is also a European Central Bank Governing
Council member, told a conference Portugal’s economy was in a
“serious and difficult moment” but in the long-term public
finances are sustainable.

“Portugal has once again a budget deficit which is high and
there is an imperative need to reduce it,” he said, adding the
country would need painful spending cuts and most likely a hike
in indirect taxes, like value-added tax, to reduce the deficit.

But Economy Minister Jose Vieira da Silva said the
government had no short- or medium-term plans to raise taxes.

“It (a tax rise) is Dr Constancio’s opinion and the
government does not subscribe to this point of view,” he said.

Raising taxes could be deeply unpopular with the Portuguese,
who have faced years of austerity as Portugal had its own
homegrown crisis earlier this decade before the global economy
spluttered in 2008.

Portugal’s budget deficit soared to 9.3 percent of gross
domestic product last year from 2008’s 2.6 percent as the
country grappled with its worst recession in decades. The
Socialist government has pledged to reduce it to below 3 percent
of GDP by 2013 via additional spending cuts in 2011 onwards.

In the 2010 budget, presented last week, the government said
it would freeze public sector wages and anticipated a small rise
in revenues, which should allow it to bring the deficit down to
8.3 percent this year.

“Personally I have an outlook which I consider relatively
pessimistic about our short-term developments, given that the
difficulties and adjustments we have to carry out really are of
great significance,” Constancio said.

Last week, ratings agencies demanded a clear plan of further
Portuguese budget deficit cuts after this year’s budget plan
failed to meet their concerns. Their warnings, added to the
overall market concerns, caused bond spreads to blow out.

Finance Minister Fernando Teixeira dos Santos warned the
unease in financial markets over Greece’s fiscal problems could
spread to other countries after hitting Portuguese bonds even
though the country’s situation “is completely different from
Greece.”

“Any attempt to draw parallels between the two situations
(Greece and Portugal) is unjustified,” Teixeira dos Santos said.

The premium investors demand to hold 10-year Portuguese
government bonds over German Bunds rose five points to 125 bps
on Tuesday after retreating from nearly 135 points reached
earlier in the day.

Prime Minister Jose Socrates told French newspaper
Liberation in an interview published on Tuesday he did not
understand markets’ suspicion of his country.

“I really feel that the markets don’t care about economic
reality, and instead base their judgement on prejudices and
impressions,” he was quoted as saying.

Felipe Garcia, an analyst at Informacao de Mercados
Financeiros, said Constancio’s “diagnosis is late but it is
correct”.

“We will now see if the government has the courage to take
the necessary measures,” he said.

The Socialist government expects growth of 0.7 percent this
year after a contraction of 2.6 percent in 2009. Unemployment is
at its highest since the 1980s, at 9.8 percent.

Constancio said he expected Portugal to grow below the euro
zone average, but believed Portugal’s public finances could be
put on a sustainable path over time.

“In the long-term Portuguese public finances are on a
sustainable trajectory,” he said.

Investing Research

(Additional reporting by Filipa Cunha Lima; writing by Axel
Bugge and Andrei Khalip; editing by Ron Askew)

UPDATE 3-ECB’s Constancio “relatively pessimistic” on Portugal