Novo Banco shatters Portugal’s aspiring budget deficit targets

Capitalization of Novo Banco, Portugal's third largest lender took a toll over the country's finances. Portugal's National Statistics Institute (NSI) revised 2014 budget deficit from 4.5% of GDP to staggering 7.5% of GDP to take the capitalization of the troubled bank into account.

This month's failed auction of Novo Banco led to addition of € 4.9 billion into 2014's budget account. Portugal had said the bids from Chinese and US bidders were too low.

Last week, rating agency Standard &Poor revised Portugal's rating to BB+ just a notch below investment grade. However if the government fails to sale Novo at expected price it would strain this year's budget as well, whereas a sale would improve this year's balance sheet.

Though this is just an accounting norms and unlikely to have much of a financial impact, it might have much greater political impact as Portugal is going into election in weeks and this would be sighted by opposition as clear setback.