Portugal Default Risk Hits Record High as Deficit Soars

And the problems just keep coming! Portugal crisis continues to be a problem for the eurozone after the latest reports showed that the nation's budget deficit exceeded the government's target.

Thursday, March 31, 2011 8:56 am EST

The sovereign debt crisis in Portugal continued to escalate Thursday after the latest reading on the nation’s budget deficit came in above the government’s target.

The National Statistics Institute reported that Portugal’s budget deficit in 2010 was 8.6% of GDP, well north of the 7.3% the government was expecting would help alleviate concerns. Furthermore, it is substantially above the euro zone’s 3.0% limit, although though NSI noted its calculations were based on new accounting rules which include the cost of providing financial assistance to banks and state companies. Nonetheless, as Greece and Ireland have shown in the past year, several members of the “PIIGS” do not seem to mind violating euro zone regulations such as the Maastricht Treaty.

Following the release of the deficit data, the cost of insuring against a Portuguese default reached another new record high. Credit default swaps on Portuguese debt climbed 13 basis points to 579, according to data provider CMA.

Portugal’s president, Anibal Cavaco Silva, a figurehead who has no government role but does oversee elections, was scheduled to meet with advisers on Thursday before plans to announce a date for the election of a new government. The date of the election is critical because because prior to any financial bailout, the country would need a government in power to hammer out the terms of a rescue package.

Speculation has arisen that Silva is targeting an election in late May or early June. However, prior to then Portugal faces one and possibly two significant tests – it has to rollover 4.5 billion euros in government debt in April and another 4.96 billion in June.

Judging by recent history, particularly with regard to Greece and Ireland, financial markets will likely force Portugal into requiring a bailout to meet its financial obligations. Such a scenario would inherently involve further fiat money creation by the European Central Bank (ECB), which would provide a tailwind for gold and other precious metals. Moreover, it would contribute to more criticism of the euro currency, which plunged to multi-year lows in June 2010 at the height of the crisis in Greece.

However, although financial markets in Portugal were pressured on Thursday, the euro currency advanced 0.4% to 1.4158 against the U.S. dollar in morning trading.

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