With back against wall, Portugal pushes on with austerity

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LISBON: 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 would make it difficult for the government to reduce the public sector deficit to 5.5 per cent of gross domestic product to keep it eligible for funds under its 78-billion-euro bailout from the European Union (EU) and International Monetary Fund (IMF).

Standard & Poor’s (S&P) 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 euro (US$1.7 billion) gap.

S&P 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 further reductions in public spending instead of the raising of taxes, with social security, health and education likely to bear 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 per cent 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 Portuguese citizens, the prime minister told the nation on Sunday. — AFP