March 21, 2012 / 11:21 AM / 8 years ago

UPDATE 2-Portugal core deficit soars, stokes slippage fears

* Core public deficit hits 799 mln euros in Jan-Feb

* Tax revenues drop, spending higher

* Portugal may well need extra aid this year -analysts

* Debt yields shrug off bad numbers, restructuring worries recede

By Andrei Khalip

LISBON, March 21 (Reuters) - Portugal’s core public deficit nearly tripled in the first two months of 2012, showing a deepening economic slump is denting tax collection and stoking concerns the country may miss its budget targets and follow Greece in requiring more rescue funds.

The gap widened to 799 million euros ($1.06 billion) from 274 million euros a year earlier, when the deficit had slumped by more than 70 percent, the finance ministry’s budget office said on Tuesday.

But, investors appeared to shrug off the numbers and bought 1.99 billion euros in Treasury bills on Wednesday at the lowest yield levels since late 2010, before the country resorted to a 78-billion-euro EU/IMF bailout in May last year.

Still, the growing deficit shows the debt-laden nation has its work cut out to hit fiscal targets under the bailout even after closely following the creditors’ austerity recipe.

“With a weakening economy you collect less taxes, it’s simple. Portugal is considered a good pupil in terms of austerity, so if something is not working, something probably has to change in the adjustment programme,” said Filipe Garcia, head of Informacao de Mercados Financeiros consultants.

“Unlike with Greece, the blame cannot be put on Portugal. But I think Portugal needs more money,” he said, explaining that additional funds are needed principally in the economy, which would require a combination of less stringent austerity and measures to allow financing to reach companies.

Earlier this week, Finance Minister Vitor Gaspar dismissed suggestions that Portugal, facing its worst recession since the 1970s, is slipping behind the deficit reduction and reform timetable set under the bailout programme. He ruled out asking for more rescue funds.

Wednesday’s T-Bill auction had strong demand, with traders saying the market was at least not overly worried about a Greece-like debt restructuring while it was still awash with cash after European Central Bank’s cheap liquidity injections.

The country sold 2 billion euros in Treasury bills at the auction.

“It’s a decent offering which shows that fears of a knock-on effect from Greece’s debt restructuring do not seem to be reflected on Portugal’s short-term debt now. The whole sovereign risk receded and this sale helps the sentiment,” said Orlando Green, fixed income strategist at Credit Agricole in London.

Benchmark 10-year bonds yielded 12.7 percent, down from the settlement level of 12.86 percent on Tuesday, when they shed almost one percentage point. That is still almost 6 percentage points above those of Ireland, which was bailed out in 2010 and has returned to modest growth since.

But many economists fear the recession-hit Portugal will be forced to follow Greece’s lead at least in requesting a new bailout. The government estimates GDP will slump 3.3 percent this year after a 1.6 percent decline in 2011.

“We do think Portugal will need additional assistance this year and that we’re heading for a second package, but this (deficit) data definitely won’t be a trigger for any requests,” said Jurgen Michels, a Citi economist in London.

“The data shows it will be difficult to reduce the deficit in near term, but I think it’s a bit too early to say if the targets are compromised, as the monthly data is volatile.”

Under the terms of the bailout, Portugal is supposed to return to the bond market in September 2013. Most economists say it is unlikely to be able to fully finance itself in the market so soon and will need to be supported longer, which will only be possible if it keeps meeting its fiscal goals.

The data showed state spending in the first two months of the year edged up 3.5 percent to nearly 7.06 billion euros, which included extraordinary transfers to public companies like the RTP broadcaster.

Revenues fell 4.3 percent 6.26 billion euros, which authorities attributed mostly to dividend payments by companies at the end of last year instead of early 2012, when taxes increased.

Portugal’s government has hiked taxes across the board and has been cutting spending to reduce the budget deficit as agreed under the bailout.

It met last year’s target of 5.9 percent of GDP for the overall deficit, to a large extent thanks to extraordinary transfers of bank pension funds to state coffers, reducing the gap from 9.8 percent in 2010. This year’s goal is 4.5 percent.

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