November 26, 2010

Portuguese Parliament Passes Austerity Budget

Portugal is latest PIIG country in trouble, but denies need for bailout

 

Portugal passed a tough austerity budget for 2011 on Friday, shepherded by Parliament speaker Jaime Gama (left), even as it denied reports in the Financial Times Deutschland saying that the European Central Bank (ECB) and many euro zone countries were pressuring Lisbon to accept a bailout.

The new budget is intended to cut the country’s deficit to 4.6% of GDP in 2011; currently it stands at 7.3%. It raises the value added tax (VAT) from 21% to 23%, cuts civil servant wages by 5%, and slashes public spending. Strikers had paralyzed the country on Wednesday in protest.

According to a Reuters report, FT Deutschland had said early on Friday, just hours before the budget adoption, that Lisbon was being pressured to follow Greece and Ireland into bailout territory. Portugal denied such news, with a government spokesman quoted as saying, “this news article is completely false.” European Commission President Jose Manuel Barroso, former prime minister of Portugal, declared, "I can tell you that it's absolutely false, completely false.”

Prime Minister Jose Socrates also refuted the news, saying instead that the passage of the budget took Portugal out of "the center of a large-scale financial crisis." Earlier in the week, the country’s bond spread had risen as Ireland’s situation stirred fears of contagion and Lisbon was thought to be next on the list.

Meanwhile, Ireland, which had earlier accepted a rescue package, faced further political troubles as minority party Sinn Fein gained an extra seat and threatened to block the country’s austerity budget and the bailout itself. Reuters reported that the winner of the seat in Donegal, Sinn Fein's Pearse Doherty, said he intended to vote against the budget when it comes before parliament on Dec. 7 and further would attempt to force an election.

Doherty was quoted as saying, "I will try and bring down this government and make sure all of the parties get to go to the people."

Gerry Adams, head of Sinn Fein, said that his party’s goal was to take over power in Dublin and halt the austerity measures imposed by the IMF. "We didn't buy into the austerity. We're not for the savage cuts where once again in the four-year plan the wealthy get off," he said. The “savage cuts” are those in the austerity program proposed this week by Prime Minister Brian Cowen.

If the budget fails, the rescue package may be put on hold until the International Monetary Fund (IMF) is sure that Ireland will work to reduce its deficit.

Spreads on Irish, Portuguese and Spanish bonds all rose Friday as fear of contagion kept investors wary. Amid all the turmoil, Spain, too, went on the offensive, denying that it would need a bailout. Even as the premium on its bonds hit an all-time high in the life of the euro, Prime Minister Jose Luis Rodriguez Zapatero said in a Reuters report that there was "absolutely" no chance Spain would have to resort to asking for a bailout.

He also said Madrid did not plan to further tighten belts in the country through austerity measures, and that “those who are taking short positions against Spain are going to be mistaken,” according to a statement he gave to private regional broadcaster RAC1 radio.

To read more about Portugal and the euro zone crisis, go to AdvisorOne.com.

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