Economic Outlook: Credibility gaps

Portugal and Ireland revealed financial troubles deeper than previously thought Thursday, setting the stage for renewed investor distress on the continent.

Portugal said its budget deficit in 2010 had failed to meet the target of 7.3 percent of the country's gross domestic product, despite austerity budgeting, the deficit to output ratio is now nearly three times the 3 percent target set by the European Union.

The deficit is now 8.6 percent of the GDP, but suddenly, having failed to meet its target, numbers that come from Lisbon sound shakier than they did before. For example, Portugal said it was still on schedule to reduce the deficit to 4.6 percent of its GDP by the end of the year. How credible does that sound?

The intentions sound credible, but investors are placing money on the table and haven't much time for good intentions. The smart money is on Portugal dipping into the European Union's bailout fund soon, as yields on 10-year government debt are at 8.5 percent -- higher than they were when Greece and Ireland accepted international assistance, The New York Times pointed out.

In Ireland, the results of bank stress tests released Thursday showed that four Irish banks, including Allied Irish Bank and the Bank of Ireland, would require $34 billion to cover losses in the mortgage market. In addition, Anglo Irish bank, which was not subjected to a stress test, said it lost $25 billion in 2010, a record loss for a corporation in Ireland.

In Portugal, Finance Minister Fernando Teixeira dos Santos said: "Everything is worse. Confidence isn't the same, and everything is harder," The Washington Post reported.

In Dublin, Central Bank of Ireland Gov. Patrick Honohan said: "This has been one of the costliest banking crises in history. There was a need for the banks to have ample capital to meet the markets' gloomy prognostications."

In the United States the response might be to duck down and keep out of harm's way for a while. With continued fighting in Libya, oil prices shot up Thursday, reaching a two and a half year high at close to $107 per barrel.

The all-important employment situation report showed the economy added 216,000 non-farm jobs in March, knocking the unemployment rate down one tenth of a percentage point to 8.8 percent.

For all the speed bumps, the U.S. economy looks to be at least far calmer than Japan and Europe for now, the federal response to the financial crisis of 2008 appearing to hold water at least for the time being.

In international markets Friday, the Nikkei 225 index in Japan fell 0.48 percent, while the Shanghai composite index in China rose 1.34 percent. The Hang Seng index in Hong Kong rose 1.17 percent, while the Sensex in India slipped 0.13 percent.

The S&P/ASX 200 index in Australia rose 0.5 percent.

In midday trading in Europe, the FTSE 100 index in Britain rose 1.04 percent, while the DAX 30 in Germany added 1.23 percent. The CAC 40 in France gained 0.82 percent, while the Stoxx Europe 600 rose 0.6 percent.
ANTHONY HALL || United Press International