Financial giant Commerzbank says that Portugal has changed from "a good student" into "the problem child of the eurozone" and risks ending up just like Greece.
The new Portuguese government is criticised for carrying out a "fundamental change of policy" that will lead to an increase in debt and an erosion of competitiveness.
In a devastating report, the influential Commerzbank says that the Portuguese situation can quickly evolve into something very similar to that which Greece went through last summer.
If the rating agency DBRS downgrades Portugal, the country no longer can count on the debt purchase support from the European Central Bank unless there is a second bailout, according to Commerzbank.
Portugal has once again become "a problem child" within the eurozone, and Commerzbank and several other investment banks have noted that in the immediate post-election period, "the new government in Portugal is moving from words to deeds and already has started a fundamental change in economic policy."
The note to clients was written by the economists Ralph Solveen and Jörg Krämer, the latter being the influential chief economist at Commerzbank.
In the advice sent to clients, the German bank makes numerous criticisms of the measures already announced and reversed by Portugal’s new government.
Commerzbank is echoing the opinion of the European Commission which has observed that Portugal’s government clearly is not counting on the liberalisation and reduction of regulation to revive the struggling economy.
Commerzbank also does not believe that Portugal’s deficit will end up below 3% this year.
Solveen and Krämer have little faith in the forecasts by Mario Centeno, Minister of Finance, who assumes that there will be a "much stronger growth, coupled with tax revenues" and lower public spending.
Even if the government achieves a deficit of around 3% in 2016, "it will be close to one percentage point higher than that agreed with the Troika," which means that Portugal will have to continue under the procedures for excessive deficit cases.
Even more serious than the deficit are rule changes in the labour market which will bring higher costs for businesses, advise the economists.
Commerzbank agrees with former deputy PM Paulo Portas who already has observed that the new government seems to be unravelling all the good work that the Passos Coelho coalition government managed to achieve.
The Germans advise that all the progress made in recent years, especially the reduction in labour costs to attract foreign investment, is at risk, adding that low labour costs were "a huge reason for the recovery registered in the Portuguese economy" including gains in employment and private consumption.
If there is a cut in Portugal’s rating by DRBS, the European Central Bank would no longer be able to buy Portuguese debt under the quantitative easing program.
The only way to continue to benefit from debt purchases would be for Portugal to enter a new bailout agreement.
"The new government will certainly try to avoid asking for a new bailout, as this could put the country in the same situation as Greece in the first half of 2015,” admits Commerzbank.
This would lead to “a revolt within the left wing alliance, the loss of a tenuous parliamentary majority and possible a new election” ends the downbeat Commerzbank report to investors.
