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A demonstrating police officer holds a sign that reads "struggle" during a protest in front of parliament in Lisbon on Sept. 28, 2011. Portuguese police were protesting against changes in labour legislation that will affect their salaries. (RAFAEL MARCHANTE/Reuters/RAFAEL MARCHANTE/Reuters)
A demonstrating police officer holds a sign that reads "struggle" during a protest in front of parliament in Lisbon on Sept. 28, 2011. Portuguese police were protesting against changes in labour legislation that will affect their salaries. (RAFAEL MARCHANTE/Reuters/RAFAEL MARCHANTE/Reuters)

Next worry: Portugal Add to ...

Worried about Greece? That’s soooo last week. The folks at Brockhouse Cooper believe that Greece is going to need a third round of bailout cash from the euro zone – but Portugal is likely the country facing more urgent attention. Oh sure, Portugal has big plans for bringing its deficit to just 3 per cent of its gross domestic product by 2013, and report a primary surplus after ignoring interest payments.

“Yet looking at deficit figures in isolation misses the point; Portugal’s debt sustainability will depend much more on its future growth prospects than on whether it reduces its budget deficit successfully,” said global macro strategist Pierre Lapointe, in a note.

He argues that the country’s debt-to-GDP ratio would drift higher in the coming decade unless the economy can grow about 2 percentage points over the average of the past decade, after ignoring inflation. He doesn’t think this is possible, for three reasons.

1. Austerity measures will choke growth.

2. The private sector is cutting back on debt, otherwise known as deleveraging.

3. Portugal could face deflationary pressures as it lowers labour costs and increase its competiveness.

“Whichever way we look at it, Portugal’s debt sustainability does not look very good – regardless of the government’s efforts to reduce its budget deficit,” Mr. Lapointe said. “This calls for a restructuring of Portuguese sovereign debt, which in our view will happen in the coming months.”

You do have to wonder how much optimism is factored into stock markets right now. Europe has been leading the world’s stock markets over the past few months. Germany’s DAX index is up 18 per cent in 2012 and up a spectacular 34 per cent since hitting a bear-market low in September. France’s benchmark index has bounced 24 per cent from its September low and Italy’s index has risen 21 per cent.

By comparison, Portugal is drifting: It has risen 1.8 per cent this year and 8.5 per cent from its low in November – but these modest gains hardly suggest big concerns ahead.

Follow on Twitter: @dberman_ROB

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