LISBON (Reuters) - Portugal approved its 2011 austerity budget on Friday, vowing to spur growth and apply tough spending cuts as it seeks to avoid an Irish-style bailout.
Parliament adopted the budget hours after a Financial Times Deutschland report said that most euro zone countries and the European Central Bank (ECB) were pressing Lisbon to seek an international rescue package as Greece and Ireland had done.
But Prime Minister Jose Socrates said the budget’s passage, which concluded many months of political bickering that at one point threatened the government’s survival, removed Portugal from the crosshairs of the euro zone crisis.
“I have good expectations that approval of the budget will reinforce confidence in markets,” Socrates told foreign correspondents in Lisbon.
He said the budget placed Portugal among the countries with the lowest budget deficits in Europe next year.
The risk premium for holding Portuguese government debt, as measured by its 10-year bond yields compared to safer German Bunds, had hit record highs this week as concerns rose after Ireland requested a bailout.
The spread fell six basis points to 448 basis points, almost 4.5 percentage points, after hitting a session high of 471 early Friday. The PSI20 stock index closed 0.6 percent lower, with banks leading the decline.
FT Deutschland said a majority of euro zone states and the ECB were leaning on Portugal to follow the example of Ireland and Greece and seek aid from the European Union and International Monetary Fund.
A government spokesman said “this news article is completely false” while European Commission President Jose Manuel Barroso, a former Portuguese prime minister, said an aid plan for Portugal had neither been requested nor suggested.
“I can tell you that it’s absolutely false, completely false,” he told reporters in Paris,
NEXT WEAK LINK?
Economists have said Portugal is the likely next weak euro zone country to need financial help as it struggles with low competitiveness and a high budget deficit. A Reuters poll of economists this week found 34 out of 50 expected a bailout.
“The market is now assuming a bailout for not just Portugal but also Spain, but it is moving slowly, with the officials reluctant to concede it will happen,” said Peter Chatwell, a rate strategist for Credit Agricole in London.
Chatwell said the “the market does not really see a timeline for this,” adding that pressure will continue in debt markets. “There is no announcement expected this weekend.”
Socrates has repeatedly denied that his country needs a bailout and has underlined that it will do everything possible to meet goals to cut the budget deficit -- although many economists fear this will push Portugal back into recession.
“As of now, the government’s priorities are meeting the budget and boosting growth,” Socrates said.
Finance Minister Fernando Teixeira dos Santos told the daily Jornal de Noticias:
“I don’t want to refer to this or that country, much less Germany. But there (are) among our partners in the European Union those who think the best way of preserving stability in the euro area is to push and force those countries that have been in the spotlight to seek aid.”
Socrates said that Europe has to “define rapidly a strategy that gives stability to the euro zone.”
The Portuguese budget aims to cut the deficit to 4.6 percent of gross domestic product next year from 7.3 percent this year.
It includes measures such as a five percent cut in civil servants’ pay and an increase in value-added tax to 23 percent from 21 percent.
Portugal’s budget deficit is considerably lower than that of Ireland and it has none of Ireland’s banking problems. But it investors still fear it may need a bailout because of its spiralling debt costs and low competitiveness.
Additional reporting by Sergio Goncalves and Shrikesh Laxmidas; editing by Kevin Liffey
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