One might forgive Portugal’s financial establishment the occasional howl of anguish or even rage. After making a series of commitments in return for a €78 million bailout package in May, Portugal did what it promised in the second half of the year.
Above all, the fiscal deficit came down from almost 10% to around 4%, ahead of the 5.9% target Portugal had been set for the year-end. Its reward for keeping its word? The country found itself attacked by merciless capital markets during the first six weeks of 2012 amid speculation it would need another bailout, despite having little sovereign debt to refinance this year.
By the end of January, yields on benchmark 10-year Portuguese bonds had risen above 17%, despite no new data to suggest there had been any further deterioration in the country’s finances. The surge in borrowing costs instead reflected the failure of negotiations to provide Greece with its latest round of bailout funding.
Despite its progress since last year’s deal with the troika – the IMF, European Central Bank (ECB) and the European Commission – the markets appeared to have decided Portugal would be next.
The credit ratings agencies did not help either.