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Portugal’s new austerity plan could bring government down

Published on 15/03/2011

Portugal's new austerity package, which won plaudits from the EU and financial markets, has come under blistering fire from the opposition and the media, raising fears it could bring down the socialist minority government.

Finance Minister Fernando Teixeira dos Santos announced Friday that the country would tighten its austerity measures to ensure it meets its deficit reduction targets.

But the main opposition Social Democrats (PSD), which had allowed passage of previous austerity measures “in the national interest,” signalled that it would not support the new measures and even refused to discuss them with Prime Minister Jose Socrates.

The new package, the fourth in less than a year, was reportedly worked out in close cooperation with the European Commission and the European Central Bank.

It aims to ensure Portugal’s public deficit meets EU norms by 2012 amid mounting speculation Lisbon will have to follow Greece and Ireland in being forced to accept an international bailout.

“We are going to reinforce the measures to reduce planned expenditures in 2011 in order to open up a supplementary margin which will guarantee in an even stronger manner attaining the target of a public sector deficit of 4.6 percent” of gross domestic product, Teixeira dos Santos said Friday.

But as pressure from the debt market eased Monday, the opposition and the Portuguese media lambasted Socrates, accusing him of negotiating directly with the EU and the European Central Bank commitments he was not in a position to meet.

“In choosing to negotiate with the European Commission and the European Central Bank measures which it hid from the country, the government showed its contempt for the institutions and the people,” said PSD chief Pedro Passos Coelho, who is currently ahead in opinion polls.

Commentators focused their criticism less on the content of the measures (VAT hikes on basic necessities, lower pensions, cuts in health care spending and overhaul of unemployment benefits) than on the method chosen by the prime minister.

“The Socrates era is over. He is now just the puppet of the foreign ventriloquist which helps us, finances us and governs us,” the business daily Jornal de Negocios railed in an editorial.

“Socrates knows that putting the country, the president, social partners and the PSD before a fait accompli can only trigger a political crisis, the fall of the government and new elections,” warned the reference daily Publico.

Sunday, the head of the socialist group in parliament, Francisco Assis, conceded that the PSD stance created “a new political situation”.

“Portugal’s political stability is under question,” he noted.

Commentators believe that while Socrates can do without a vote on budget cuts this year, he will be forced to present parliament with a new stability and growth package for 2012-2013, which is to be submitted to the EU commission late next month.

“If the opposition rejects it, which is likely, the country will have to face new elections,” Publico said.

Until now, Socrates has simply expressed regret over the PSD stand, saying he is acting “to serve Portugal and defend the country.”

Last week, he warned that Portugal would lose its “prestige” and “dignity” if it sought a bailout.

Monday, Teixeira dos Santos said Lisbon intended to keep borrowing on the commercial money markets despite sky-high interest rates which many economists consider unsustainable in the long term.

He said the additional measures were necessary due to the risks tied to the volatility of debt markets, where Portugal now has to pay record levels of interest to investors since it adopted the euro.

“Our intention is to keep going to the market, borrowing the money we need,” Teixeira dos Santos said as he arrived for a eurozone finance ministers meeting, held after a summit Friday agreed on new steps to help debt-burdened member states.

Eurozone heads of state and government agreed Friday to allow rescue funds to buy bonds issued by countries struggling with debt but on condition that they agree to austerity and other changes as part of an international rescue.

Portugal’s debt stood at 143 billion euros in 2010, or 83.3 percent of GDP, above the EU limit of 60 percent.

The slow growth that Portugal has managed over the past decade, and its current economic contraction, will make it more difficult to service the debt.