With back against wall, Portugal pushes on with austerity

Despite the risk of aggravating the recession and unemployment, Portugal's government is wagering that following the austerity prescribed by its creditors will help it regain market confidence and avoid a second bailout.

"That method isn't great but a change of strategy could only be decided at the European level," said Rene Defossez, a bond analyst at Natixis investment bank.

"Portugal doesn't have the political wherewithal to abandon austerity policies," he told AFP.

Portugal's Constitutional Court last week ruled that several measures in the government's 2013 budget were unlawful, which will make it difficult for the government to reduce the public sector deficit to 5.5 percent of gross domestic product to keep it eligible for funds under its 78-billion-euro bailout from the European Union and International Monetary Fund.

Standard & Poor's rating agency warned that further EU and IMF "support would be jeopardised were the Portuguese government unable or unwilling to abide by its programme commitments."

The court ruling against the scrapping of a bonus 14th month of salary for civil servants and retirees, as well as some cuts to unemployment and sickness benefits, means that the government of Prime Minister Pedro Passos Coelho is scrambling to plug a 1.3 billion euros ($1.7 bn) gap.

Standard & Poor's said "it will be challenging for the government to identify such measures at short notice. This increases the risk that the 2013 fiscal target will be missed."

Coelho has called for making further reductions in public spending instead of raising taxes, with social security, health and education likely to feel the brunt of the additional cuts.

The finance minister decided Tuesday to freeze all non-essential spending to try to help close the gap.

Criticism of the austerity policy which has triggered the deepest recession since 1975 and unemployment of 16.9 percent has been mounting, and not only from the centre-left opposition and labour unions, but also from employers.

But Coelho has pushed ahead with austerity, warning the other options are worse.

"The alternative to austerity would lead us to another bailout, prolonging and deepening the sacrifices" on Portugese citizens, the prime minister told the nation on Sunday.

"Reducing the deficit is a indispensible condition for keeping Portugal in the eurozone," he added.

Portugal's international creditors have also kept up the pressure.

Auditors from the so-called troika of the EU, IMF and ECB now plan a special visit to Portugal this month, when their next scheduled review is for May.

The European Commission also warned Portugal that the country must respect all the conditions of its rescue programme if it wants to renegotiate the repayment deadline on its bailout loans.

Spreading out the repayment of the loans, which could be discussed at a meeting of EU finance ministers in Dublin this weekend, could provide a big boost for ensuring the sustainability of Portugese state finances.

That would make it easier for the country to achieve the goal funding itself exclusively on the bond markets when the rescue programme ends in June 2014.

The determination demonstrated by the Portugese government gives it "good chances of extending the maturities" of the rescue loans which would make it "plausible again" for the country to launch its first long-term 10-year bond issue since the bailout, said BPI bank economist Paula Carvalho.

Portugal made an early return to the bond markets with a placement of medium-term debt in January, raising 2.5 billion euros at a rate of 4.891 percent.

On the secondary market on Tuesday, the yields on Portugese 10-year bonds rose to 6.453 percent from 6.415 percent on Monday, a rate at which many economists would still consider too expensive for a country generating no growth.

According to government forecasts, the Portuguese economy will shrink by 2.3 percent this year and the unemployment rate will climb over 18 percent.

"Portugal is temporarily relegated from the camp of 'good students' but it remains closer to Ireland than to the case of Greece," added Carvalho.

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