WRAPUP 4-Euro zone hit by Portuguese deficit, Irish banks

* Portuguese budget deficit higher than previously thought

* Ireland says banks need 24 bln euros in extra capital

* ECB disagrees over new liquidity scheme – sources

* Portuguese president sets June 5 election date

(Adds Portugal election date, IMF/EC/ECB on Irish stress tests)

By Axel Bugge and Carmel Crimmins

LISBON/DUBLIN, March 31 (Reuters) – Portugal revealed on
Thursday that its budget deficit had ballooned above target and
Ireland said its banks needed 24 billion euros in extra capital,
shaking euro zone markets and deepening the bloc’s debt crisis.

European leaders had hoped a package of anti-crisis measures
agreed at a Brussels summit last week would help draw a line
under the woes that have plagued the 17-nation currency area for
over a year, forcing bailouts of Greece and Ireland.

But volatile developments on Thursday showed why the bloc is
likely to remain under pressure for some time, even if many
investors have turned their attention in recent weeks to the
conflict in Libya and nuclear disaster in Japan.

In an echo of the Greek deficit revision in late 2009 that
first stoked market concerns about euro zone finances, Portugal
presented new figures showing its 2010 budget deficit totalled
8.6 percent of gross domestic product (GDP), more than a full
point above the 7.3 percent the government had been targeting.

Lisbon said the upward revision was due to a simple
accounting change demanded by Europe’s statistics agency rather
than any attempt to deceive, but bond markets responded by
pushing the yields on Portuguese bonds to new euro-era highs.

“These (revisions) are very much one-off factors and don’t
have a bearing on the deficit for next year,” said James Nixon,
European economist at Societe Generale. “That doesn’t mean to
say there shouldn’t be a funeral march for Portugal. Funding is
untenable given where yields are.”

Portugal had been under intense pressure to seek financial
assistance from the EU and IMF even before Prime Minister Jose
Socrates stepped down last week following the rejection of his
latest budget cuts by parliament.

On Thursday, President Anibal Cavaco Silva dissolved
parliament and set a June 5 date for a snap general election,
meaning two more months of political uncertainty when the
country can least afford it. [ID:nLSB001081]

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For stories on Ireland's debt crisis click [ID:nLDE68T0MG] Ireland's banks and economy: http://r.reuters.com/nyt78r Bank exposure to peripheral debt: http://r.reuters.com/puh78r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^


While Portugal’s main problem is its lack of competitiveness
and sluggish economy, Ireland’s woes are largely down to its
banks, whose reckless lending during the “Celtic Tiger” boom
years ended up tearing huge holes in their balance sheets when
the global financial crisis hit.

Ireland had hoped to persuade investors that it had its
stricken financial sector under control by presenting the
results of new “stress tests” for its banks on Thursday.

It said its four remaining lenders — Allied Irish Banks
(ALBK.I: Quote, Profile, Research), Bank of Ireland (BKIR.I: Quote, Profile, Research), EBS building society and
Irish Life and Permanent — needed another 24 billion euros to
withstand potential losses from a weaker economy.

The loss figure was in line with expectations and fell
within the 35 billion euros set aside for the banks in Ireland’s
EU/IMF bailout last year.

The tests were praised as “rigorous” by the European
Commission, IMF and European Central Bank, which issued a joint
statement calling them a major step towards returning the
banking system to health. [ID:nWEA2228]

But some economists fear more losses may be lurking at the
four banks, which are to be restructured into two lenders under
plans announced on Thursday.

“This is the fifth recapitalisation of the banks and it’s
highly unlikely that this will draw a line in the sand,” said
Stephen Kinsella, an economics professor at the University of

Compounding the problem was news that vital support from the
ECB may not be forthcoming.

Euro zone official sources told Reuters on Thursday that due
to internal disagreements within the ECB’s Governing Council,
plans to announce a new liquidity facility for Irish banks had
been scrapped. [ID:nLDE72T20R]

The ECB is struggling to find a solution to how it reins in
the emergency support it has given to money markets since the
financial crisis hit in 2008, without paralysing some banks.

Patrick Honohan, the governor of Ireland’s central bank,
played down the importance of the ECB liquidity deal, saying he
was “reasonably relaxed”.


Portugal’s president said Socrates’ government would remain
in office in a caretaker capacity until the election. It has
strongly resisted pressure to seek a bailout and would have
diminished power to secure one even if it wanted to.

The leader of Portugal’s opposition has pointed to the
option of a bridging loan to tide the country over until a new
government is in place. [ID:nLDE72P0DF]

News of the higher-than-expected deficit — due to losses at
a nationalised bank and public transport companies — came ahead
of a funding crunch in which the government must refinance a
total of roughly nine billion euros in debt in April and June.

“The government is not irresponsible and will guarantee that
there is the necessary financing so the country can live up to
its responsibilities and honour commitments to its creditors,”
Finance Minister Fernando Teixeira dos Santos insisted.

But the state bond agency, in its plans for the second
quarter, admitted that any bond issuance would be subject to
market conditions — a reference it has not made previously that
suggests doubt about finding buyers at feasible prices.

Portuguese 10-year yields (PT10YT=RR: Quote, Profile, Research) climbed above 8.6
percent, more than five percentage points above German bonds.

The latest turbulence has not hurt the euro, which was
trading at $1.4170 on Thursday and has risen steadily against
the dollar since the start of the year, driven by expectations
the ECB will begin tightening monetary policy next week.
(Writing by Noah Barkin, Patrick Graham and Sophie Walker;
editing by David Stamp)

WRAPUP 4-Euro zone hit by Portuguese deficit, Irish banks