Greece has agreed to find €24bn in fiscal savings in order to stave off default and get international aid back on track. Austerity is back in Athens, at last. Or so we hope.
Now how about Lisbon?
Running the numbers on its own fiscal austerity plans in a note on Friday, Goldman analyst Nick Kojucharov has given us a chance to see if that’s a risk.
And, well, the plan is good in theory, as Kojucharov notes:
On the face of it, the fiscal consolidation envisioned in Portugal’s latest Stability and Growth Program is reasonably aggressive (6.6ppt over four years), and is designed to reduce the deficit back below the 3% Maastricht limit by 2013, and to stabilise the debt-to-GDP ratio at around 90% by 2012.
But in practice…
Two thirds of savings will be made through slashing spending, including cuts to wages and welfare. The tough stuff, in short. But — not for a while:
Despite the merits of the program’s overall policy composition, we think it creates unnecessary risks by being excessively back-loaded. Only a 1% reduction in the deficit is planned for 2010, the entirety of which stems from an expected rebound in revenues. And of this 1% rise in revenues as a share of GDP, nearly three-quarters comes from the rather arcane category of non-tax “other revenues,” (fines, etc.), which are generally acyclical but in this case provide an uncharacteristically and rather inadequately explained large one-off boost. For all intents and purposes, therefore, the 2010 budget is devoid of any active policy adjustments, and the year as a whole is essentially a “lost” opportunity to make early inroads into the consolidation process.
Ah, public finances. Fitch noted the same problem with back-loading in its own recent downgrade of Portuguese government paper from AA to AA-.
Waiting for recovery is also a bad idea if, er, recovery won’t arrive. As Kojucharov writes:
If we assume that real GDP growth in 2010 comes in flat as opposed to the 0.7%yoy currently envisioned by the SGP, then the 2010 deficit declines to just 9.0% of GDP as opposed to 8.3%, and no longer falls below 3% by 2013. Moreover, the ratio of outstanding debt-to-GDP, which was already declining by 2013 under the SGP scenario, is still on a (slight) upward trajectory in the low-growth scenario.
Or, in chart form (click to enlarge):
As Kojucharov says of the Portuguese budget’s lack of front-loaded cuts: ‘we think it will have to reconsider’. Quite. And quickly. For as the Goldman note also observes, Portugal’s near-term debt refinancing schedule looks very, er, Hellenic:
Portugal’s financing schedule for the remainder of this year (Table 2 [below, click to enlarge) shares some similarities with Greece’s—an outsized lump of obligations in May (€7.8bn of debt service obligations on top of what we estimate will be roughly €0.7bn in primary deficits, and at least an €0.8bn contribution to the Greece rescue package), followed by a relatively light financing load in subsequent months…
…Apart from the May financing needs, there are also pressure points stemming from the fact that the government has a large portfolio of short-term debt to roll over this year. Given the current fluidity of sovereign spreads, rolling this short-term debt may prove much costlier than the debt management office had initially envisioned, and force the government to make additional fiscal adjustment in order to stay within its budget.
It’s all going a bit Greek.