Eurogroup President Jeroen Dijsselbloem and Germany’s Wolfgang Schäuble warned Portugal’s leftist government Thursday of the dangers of backtracking on the fiscal reforms carried out by its conservative predecessors in order to meet EU budget rules.
“The Portuguese budget is not the first, nor is it the only one, that has a risk of default. The basic rule is that Portugal must be ready, if necessary, to do more to comply with the rules of the [Stability and Growth] Pact,” said the Dutchman as he headed into a meeting of eurozone finance ministers in Brussels.
Schäuble, the German finance minister, said as he arrived that “it would be very dangerous for Portugal [with the markets getting nervous] if the country gives the impression it is backtracking on the road traveled so far.”
Prime Minister António Costa said, however, that Portugal would not need any additional fiscal measures.
“The budget has all the conditions to be implemented fully,” Costa told reporters. “We are well aware of the assessment made by the Commission, we are aware of the risks and we will strive to strengthen confidence.”
Last week, the European Commission warned that Portugal’s budget plan was at risk of failing to comply with European rules requiring the budget deficit to fall below 3 percent of GDP and public debt below 60 percent of GDP.
With the budget under pressure and the threat of a downgrade by ratings agency DBRS, the spread between Portuguese debt and benchmark German bonds is widening, indicating a heightened perception that Portuguese bonds are a risky asset. Yields on 10-year Portuguese government bonds are around their highest levels since August 2014.
If DBRS — the only ratings agency still putting Portugal above junk-bond status — does downgrade it, Portugal would no longer be eligible for bond purchases by the European Central Bank.
Finance Minister Mário Centeno said on Wednesday that Lisbon was “on alert.”
“At times there are comments that the Portuguese government is not sufficiently concerned regarding questions about financing, but this is not true,” said Centeno. “We are convinced that in May, when the rating agencies and Commission carry out their mid-term evaluations of the budget, the evaluation will be positive.”