Investors alert as Portugal begins budget struggle
Portugal’s minority government is bracing for a tough battle over its planned austerity reforms after a parliamentary vote this week failed to gather support from opposition parties.
The non-binding resolution on measures including a public sector salary freeze and social welfare cuts was passed by the parliament on Thursday but only after the main opposition party, the PSD, abstained.
Other opposition parties voted against the draconian measures.
“The debate is only just beginning,” said the newspaper Diario Economico.
“What will we say to the international community on Monday? Who will vote for the austerity measures in parliament? Who will pass the budget?”
The political wrangling came after Fitch Ratings agency downgraded Portugal’s credit rating on Wednesday, a move that set off alarm bells among investors in Europe worried about a possible repeat of Greece’s debt crisis.
International attention has shifted to eurozone countries like Portugal after a financial fix in the Greek drama was unveiled on Thursday in Brussels.
Analysts have warned that Portugal and other heavily indebted economies are also at risk, while officials have rushed to reassure investors.
“I really believe that the situations are not in the least comparable and that the markets realise that, and will realise that in the coming days,” European Union president Herman Van Rompuy said this week.
“The problem is completely different for Portugal,” he said.
Douglas Renwick, associate director of Fitch’s sovereign team, said on Wednesday that Portugal’s downgrade had been prompted by “a sizeable fiscal shock” — a reference to the explosion of the country’s public deficit in 2009.
The deficit ballooned to 9.3 percent of output last year, up 6.6 percentage points from the 2008 figure and exceeding the eurozone limit of three percent by more than three times though still below Greece’s 12.7 percent.
The government has promised to cut the deficit to the eurozone limit by 2013 but Standard & Poor’s, another ratings agency, said on Friday that it would fail to meet this deadline because of political challenges.
“This is because we believe that some implementation risk remains… particularly given that the minority government will need opposition support to pass necessary legislation,” the agency said in a statement.
It warned that Portugal’s credit outlook remained constrained “by structurally weak public finances and by anemic economic growth prospects, which we believe stem from a sluggish private sector.”
The agency also affirmed Portugal’s sovereign credit ratings, a move that helped bring down Portugal’s 10-year bond yields — the rate the government has to pay to borrow money on financial markets.
The yield fell to 4.267 percent late Friday from 4.357 percent on Thursday.
But Standard & Poor’s analyst Kai Stukenbrock warned that the ratings agency could still downgrade Portugal’s creditworthiness “should the government be unable to garner opposition support as expected.”
Portuguese Prime Minister Jose Socrates has called for “a broad consensus” to implement austerity measures but the Social Democrats (PSD), the largest opposition party, are not planning to make it easy on the government.
“We have nothing to do with this programme, we have nothing to do with the measures proposed, which are the responsibility of the government alone,” PSD leader Manuela Ferreira Leite said during Thursday’s stormy parliament debate.
She said the PSD had decided not to vote against the austerity plan only for the “national interest,” adding: “It was essential for the country.”
To make matters even more complicated, a front-runner in upcoming PSD leadership elections, Pedro Passos Cuelho, said he “didn’t feel bound” to Thursday’s stance and would not hesitate to block austerity measures.
Political analyst Antonio Costa Pinto said the deadlock will likely continue “at least until the next presidential election” in January of next year.
Meanwhile there was further pressure on the government on Friday after hundreds of young people rallied in the capital Lisbon against austerity.
Valter Loios, a youth leader of the CGTP trade union, said: “Millions of workers are demanding stability, a real increase in wages and a future.”