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by Euro Reporter
2016-07-13 10:39:27
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EU backs sanctions on Portugal, Spain for breaking deficit rules

Finance ministers of the European Union (EU) backed sanctions on Spain and Portugal for breaching European rules on budget deficit targets on Tuesday. "The Council found that Portugal and Spain had not taken effective action in response to its recommendations on measures to correct their excessive deficits ... The Council's decisions will trigger sanctions under the excessive deficit procedure," the European Council said in a statement on its website on Tuesday. The decision came after a meeting in Brussels on Tuesday of the EU's economic and financial affairs council (or Ecofin), made up of economic and finance ministers from the bloc. They met to discuss if Spain and Portugal should be sanctioned for breaching rules stating that countries' budget deficits must remain within 3 percent of gross domestic product (GDP). The European Commission — the executive arm of the EU — now has 20 days to recommend if fines should be imposed.

portugal_400_01"Those fines should amount to 0.2 percent of GDP, though Portugal and Spain can submit reasoned requests within 10 days for a reduction of the fines," the council said in its statement on Tuesday. However, Spain's acting economy minister, Luis de Guindos, said he believed any fines imposed would be "null or zero," according to Reuters. He added that Spain would revise corporate tax regulation to knock 6 billion euros ($7.9 billion) off the state budget and would save another 1.5 billion euros through low interest rates on public debt, according to Reuters. De Guindos said on Tuesday that he was sure Spain could get its deficit below three percent by 2017. "With respect to the situation for Spain it would be something of a paradox to impose a financial penalty to the best-performing European economy, which is Spain. And I think this consideration is shared by many people, not only at the Eurogroup but also at the Ecofin."  The Commission warned both Spain and Portugal back in 2013 to do more to address their budget deficits. Last week, the Commission said Portugal had not corrected its "excessive" deficit by the deadline it was given of 2015 and that Spain was unlikely to correct its deficit by the 2016 deadline.

Spain's headline deficit peaked at 11 percent in 2009 during the height of the financial crisis, before falling to 10.4 percent of GDP in 2012 and 5.1 percent in 2015, while the recommended target for 2015 was 4.2 percent of GDP. Portugal, meanwhile, saw its headline deficit decline from 11.2 percent of GDP in 2010 to 4.4 percent in 2015, while the recommended target for 2015 was 2.5 percent of GDP. However, EU officials are wary to impose fines on countries that are still recovering from the financial crisis. There is also little political appetite to do anything that could increase anti-EU sentiment, particularly after Euroscepticism led to a majority of Britons voting to leave the EU last month. Portugal's Finance Minister Mario Centeno said on Monday that sanctions would not be appropriate, but stopped short of calling Portugal's treatment unfair. "We will do our job, which is precisely to argue in favour of no sanctions for Portugal — at least a very low level of sanctions. The point here is we do have our incentives right and we are very much committed to our fiscal consolidation," Centano said. Pierre Moscovici, European commissioner for economic affairs, said on Monday that the Commission wanted to act in a "credible" manner. "This Commission wants to respect the rules. This Commission wants to be credible and stability is our road map … We don't want to penalize economies in recovery and we know that Portugal and Spain suffered from a severe crisis and the priority for them is to reduce unemployment. So dialogue is a good quality," he said. He added that the threat of sanctions alone "probably will lead to a stronger correction and to a clearer point of view."

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Portugal’s bonds post longest run of declines in five months

Portugal’s government bonds fell for a fifth day, the longest run of declines since February, as the nation faced the prospect of a fine for breaching budget-deficit limits. Yields on the nation’s 10-year securities have steadily climbed from the three-month low reached on July 1. Portugal was hit last week by an unprecedented European Union move to penalize it, along with Spain, for exceeding deficit limits designed to avert another debt crisis. That was just the latest challenge for a country that also suffers bad loans in its banks and whose government is reversing some of the reforms introduced under its bailout. “Portugal has been a problem child in the periphery space,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. Its bonds have been hurt “since the new government cancelled some of the previous reform and austerity measures. Portugal is now back in the spotlight.”

The 10-year bond yield rose four basis points, or 0.04 percentage point, to 3.12 percent as of 4:19 p.m. London time. That’s up from as low as 2.91 percent on July 1.The 2.875 percent security due July 2026 fell 0.355, or 3.55 euros per 1,000-euro ($1,105) face amount, to 97.91. Yields on similar-maturity German bonds rose two basis points to minus 0.17 percent. The extra yield Portuguese bonds offer over these benchmark securities widened for a fifth day to 3.29 percentage points. Yields on Spanish 10-year bonds climbed two basis points to 1.17 percent, while those on Italian securities due 2026 advanced two basis points to 1.21 percent. Portugal’s bonds have been the worst performers in the euro area this year, with a loss of 1.4 percent, compared with a 3.9 percent gain in Italy’s securities and a 7.1 percent return on German bunds, according to Bloomberg World Bond Indexes.

Sovereign bonds from Portugal are still considered investment grade by ratings agency DBRS Ltd., making them eligible for purchase under the European Central Bank’s quantitative-easing program. With the nation’s debt rated junk by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, a downgrade by DBRS would hit the country’s banks and raise the prospects of Portugal requiring more debt relief, Barclays Plc analysts including London-based Antonio Garcia Pascual wrote in a note. “Should DBRS decide to downgrade Portugal” below investment grade, “the loss of ECB-eligibility would create significant funding problems for Portuguese banks along with the cessation of QE purchases,” the analysts wrote, adding that this was not what they expected to happen.

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Reaction in Portugal over Brexit

The European project remains valid without the United Kingdom but the latter’s departure served as the occasion for a rethinking and strengthening of the core European values, was the message in a statement released by Portuguese President Marcelo Rebelo de Sousa. “The British people decided that the United Kingdom should no longer continue be part of the European Union, which can only bring us sadness,” the statement began. “We should respect with serenity the decision of the majority of the British people in the certainty that the European project remains valid in the defence of the values that have, already for many centuries, shaped our common identity,” the statement continued. “Portugal, as has happened for the last 30 years, should continue to remain committed to the ideals of peace, liberty, democracy, wellbeing and shared development that are at the heart of the European construction, as a central axis to the national vision and strategy for the future of the Portuguese and our country,” said Marcelo Rebelo de Sousa who signed off the statement after adding that such ideas needed “rethinking and strengthening.”

The President was also quoted by Lusa News Agency as saying his expectation was that the decision would not jeopardise the prospects of the Portuguese community resident in the United Kingdom and promised his continued attention and support in defence of their interests. The Portuguese Prime Minister meanwhile said the result was a sad day for Europe even if the alliance between Portugal and the country should remain intact. “We have with the United Kingdom the longest standing alliance in the world and this shall continue far beyond whatever comes from the exit of the United Kingdom from the European Union,” said Costa before assuring that the government would do “everything to ensure the rights of the Portuguese community in the United Kingdom” while guaranteeing “every right of British citizens that live, visit or invest in Portugal.” Costa also made a point of stressing the need to respond to the anxieties of citizens that had led to the vote but rejected the notion of a domino effect adding the time was ripe “to give a very clear signal to European citizens that the path is not towards disintegration.” Accepting that a period of turbulence might be on its way, the prime minister said that Portugal had its state financing in place through to 2017 and that the European Central Bank had already stated its willingness to act to deal with any choppy conditions going forwards.

Algarve tourism chief Desidério Silva and AHETA chairman Elidérico Viegas, have both agreed that a weaker pound will have a negative effect on tourism on what is the region’s biggest tourist market. The Algarve tourism president added that the Algarve should now look to other markets, such as the German, French and Dutch to compensate for an eventual drop in British tourists. Desidério Silva adds that the loss in buying power will also be “a negative factor” for Britons living in the Algarve. Elidérico Viegas meanwhile explained that his association is “concerned with this situation and the instability created around Brexit could have implications, most certainly for companies and the financial results of the region.” The president of the Portuguese Hotels Association (AHP) has meanwhile said that the UK’s decision to leave the EU will have no impact whatsoever on Portuguese tourism and that those who voted to leave did not travel anyway. According to Raul Martins, “there will be no consequence for tourism in Portugal.” In comments to Lusa News Agency, the AHP chief said that Brexit just “moves things from an informal to a formal situation.” “Britons who are in favour of the exit don’t travel as they are so British that they don’t leave” the UK, Raul Martins told Lusa.

He added that the British tourists who choose to visit will be welcomed just the same, adding that “there won’t be any barriers at customs for UK tourists” and the “British nationals who did not want to leave Europe have held this position for some time already.” While The Portugal News has learned of at least four potential real estate deals being cancelled by British buyers in the wake of Brexit, Ideal Homes, a real estate company based in the central Algarve, told The Portugal News that it had clinched a major deal with a British buyer within hours of Britain voting to leave the EU. Chris White, the owner of Ideal Homes, told The Portugal News on Friday afternoon that a property worth €500,000 was sold to a British family shortly after the results came out to show the Leave campaign had won the referendum. He added that seven other potential buyers from the UK had made appointments on Friday for viewings of properties in the Algarve, while another British buyer had also secured a mortgage to purchase a home. “To be honest, I was worried about the referendum results, but the business we did today clearly shows that there is still huge interest in property in the Algarve”, Chris White explained.


     
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