Portugal on Thursday disclosed new and larger budget deficits for last year, and Ireland said its banks need tens of billions of dollars in additional capital. The fresh round of bad news is likely to further shake confidence in Europe’s ability to resolve its lingering financial problems anytime soon.
The announcements from Portugal’s finance ministry and the Central Bank of Ireland show a continent still struggling to understand the depth of the problems facing its banking system and its economically weaker nations.
That lack of clarity more than two years since the onset of the world financial crisis — along with the steady adjustments to the downside — has kept world markets nervous about Europe’s ultimate resolution and it has undercut government efforts to stabilize the situation. It has also deepened an economic quandary for the 17 countries that share the euro, as nations such as Germany speed ahead in economic recovery and enjoy falling unemployment while others remain mired in recession and widespread joblessness.
The Portuguese announcement in particular seemed to put the country a step closer to an international rescue program, along the lines of the joint European-International Monetary Fund bailouts for Greece and Ireland last year.
The country’s finance ministry said the budget deficit for 2010 was much higher than initially reported, the equivalent of 8.6 percent of the country’s gross domestic product, as opposed to the 6.8 percent originally disclosed. The changes were made after European officials told the county to better account for bad loans to public companies and a government contribution to a troubled bank.
The figure means Portugal missed its deficit target for the year, further eroding the country’s credibility with investors. Interest rates on the country’s 10-year bonds hit 8.4 percent Thursday, and some shorter-term bonds were above 9 percent — well beyond the level considered sustainable.
The nation is also navigating a political standoff over how to deal with its financial problems. Prime Minister Jose Socrates resigned last week after the Portuguese parliament rejected his budget-cutting plans. The coming elections could hamper the country’s ability to negotiate international assistance until new leadership takes office.
“Everything is worse. Confidence isn’t the same, and everything is harder,” Finance Minister Fernando Teixeira dos Santos said in a news conference after the release of the new data, according to wire service and other reports from Lisbon.
The country needs to raise about $6 billion on world markets in April and the same amount in June, and many analysts expect one of those funding deadlines to trigger a request for help.
In Ireland, the central bank released results of “stress tests” it conducted on the country’s financial institutions to show how well they might respond to any future economic shock. Although officials said the tests included unduly pessimistic assumptions and built in more of a capital cushion than would probably be needed, the bottom line was stark: The nation’s four remaining private banks will have to raise an additional $34 billion in capital. The banks already rely heavily on loans from the European Central Bank and might have to turn to the government for help raising more cash — adding to Ireland’s already steep bank rescue tab.
The crisis has prompted an extensive overhaul of Ireland’s banking sector, a once high-flying industry that grew to be several times larger than the country’s economy before a real estate crash left it struggling. Government guarantees of bank debts forced Ireland to seek international help last year.
European and IMF officials welcomed the outcome of the Ireland Central Bank study, saying it was important that the needs of Ireland’s banks are clear and that the country has a credible plan in place for restoring the industry. The country nationalized two of its six banks during the crisis, is merging two others and is selling a broad set of assets and subsidiary businesses to make the survivors profitable.
Still, Ireland, which ousted the long-ruling Fianna Fail party in February elections, might be heading for a new showdown with its euro-zone neighbors.
The country’s new government has said it might need to renegotiate the terms of the loans extended by other European countries. It also wants bank bondholders to share some of the financial industry’s losses so Irish taxpayers do not foot so much of the bill.
Other European officials, particularly the European Central Bank, oppose the idea. They argue that it could undermine confidence in the euro zone and might have unintended consequences if it damages the books of banks in other countries that hold bonds issued by Irish banks.