Sept. 16 - European Commission, IMF and ECB officials arrive for their review of Portugal's austerity program. As David Pollard reports, a round of difficult negotiations could be on the cards.
Picture postcard Lisbon. The message might not be 'wish you were here' for inspectors from the European Commission, the IMF and the ECB. The so called troika is expected to play tough on conditions for Portugal's next tranche of bailout funds. But the man representing Portugal in the negotiations, deputy prime minister Paulo Portas, wants those conditions - especially rigours deficit reduction targets - eased. His demands caused a political crisis earlier this year. He says the recent 1.1 per cent surge in GDP - the highest return for any country in the euro zone over the last quarter - shows the country's on the mend. More austerity, he says, could kill that off. The potential for a spat with the Troika has made investors nervous, says CIBC's Jeremy Stretch. (SOUNDBITE) (English) JEREMY STRETCH, Head of FX Strategy, CIBC, SAYING: "The Portuguese story is one that we should be mindful of, and I think there are still ongoing risks that the political fragility will break open once again in Portugal and that will throw up further concerns." Such worries have investors selling off Portuguese bonds. Yields have risen a full percentage point to over 7 per cent - the threshold many investors see as a danger level. And with local elections on the horizon, political squabbles over public sector budget and job cuts - the main thrusts of the austerity programme - could become even more heated. Stretch says it all serves to remind markets of fundamental euro zone risk - and to reassess recent strength in european asset prices. (SOUNDBITE) (English) JEREMY STRETCH, Head of FX Strategy, CIBC, SAYING: "The peripheral risks haven't gone away. I think they're still at best dormant rather than necessarily deceased. That's going to be one of the reasons why I will be very cautious in chasing this rally in the euro higher because those peripheral concerns haven't gone away." With the US Federal Reserve widely expected to announce moves to wind down its QE programme, bond yields are expected to rise even more. Putting more pressure on the negotiations. In the words of one analyst, this could be hardest Troika review since Portugal's bailout programme started.