Portuguese Government, Opposition Reach Budget Deal After Bond Prices Slip
By Joao Lima - Oct 30, 2010 2:58 PM GMT+0200 Sat Oct 30 12:58:47 GMT 2010
Portugal’s government and biggest opposition party reached an agreement that will allow the 2011 budget to pass as the nation aims to narrow the euro region’s fourth-biggest fiscal shortfall.
“The country is going through a difficult period, and understandings are necessary for fundamental policies,”
Eduardo Catroga, a former finance minister who represented the opposition Social Democratic Party in the talks, said in Lisbon today. “The agreement is good for Portugal.”
The government agreed to reconsider large public-works projects and public-private partnerships, said Catroga, whose party has demanded fewer tax increases and greater spending reductions. On Oct. 27, the Socialist government and the Social Democrats said they halted talks on a proposal that includes the biggest spending cuts since at least the 1970s, prompting a decline in Portuguese bonds for the week amid renewed concern the country will struggle to fund itself.
Parliament will start discussing the 2011 budget on Nov. 2 and an initial vote is scheduled for the next day.
“This will be the most important budget of the last 25 years,” Finance Minister
Fernando Teixeira dos Santos said today at a press conference in Lisbon broadcast by television channel SIC Noticias. Teixeira dos Santos said additional measures may be needed to meet next year’s budget target following the agreement with the Social Democrats.
Social Democratic leader
Pedro Passos Coelho had said on Oct. 20 that the party may abstain in the vote, allowing the 2011 budget to pass, as long as the government considered its proposals. Passos Coelho had called for a “greater ambition” to cut state spending and prevent additional cost increases for infrastructure projects and public-private partnerships.
Record Borrowing
Prime Minister
Jose Socrates, lacking a parliamentary majority, needs the largest opposition party to back the budget or abstain for it to be passed.
Portugal’s
borrowing costs soared to a euro-era record on Sept. 28 as the Social Democrats threatened to vote against the budget proposal.
Europe’s sovereign debt-crisis took hold at the end of 2009 after Greece’s newly elected government said the budget deficit was twice as big as the previous administration disclosed. In April, Greece tapped a 110 billion-euro ($153 billion) loan facility from the European Union and the International Monetary Fund after being shut out of debt markets. The EU then passed a 750 billion-euro backstop for the rest of the euro region after borrowing costs surged for high-deficit nations.
Bond Sale
Teixeira dos Santos has said that Portugal won’t need to tap the euro-region’s rescue fund. Portugal doesn’t face a bond redemption until next year, and plans to sell about 1 billion euros of bills due October 2011 and February 2011 on Nov. 3.
The extra yield investors demand to hold 10-year Portuguese bonds rather than German bunds, the European benchmark, was at 343 basis points yesterday. The spread hit a record 441 basis points in September.
Teixeira dos Santos on Oct. 27 had said failure to pass the budget “will plunge the country into a profound financial crisis with very serious consequences for our economy, in which we’ll see the channels of financing for our economy blocked.”
The government plans to lower the wage bill by 5 percent for public workers earning more than 1,500 euros a month, freeze hiring and raise the value-added tax by 2 percentage points to 23 percent.
Spending Cuts
The planned spending cuts for next year are set to be the biggest since at least 1978, according to Eurostat, the EU’s statistics office. Moody’s Investors Service said on Oct. 18 that the government was responding “adequately” to market pressures to lower the deficit. Portugal is rated A1 by Moody’s and A- by Standard & Poor’s.
The nation’s budget gap reached 9.3 percent of gross domestic product last year, the highest ratio in the euro region after Ireland, Greece and Spain. It aims to lower the
shortfall to 7.3 percent this year, 4.6 percent in 2011 and meet the EU’s 3 percent limit in 2012.
The Finance Ministry forecasts Portugal’s public debt as a percentage of GDP will increase to 86.6 percent in 2011 from about 82.1 percent this year. Teixeira dos Santos said on Oct. 16 that he expects the ratio to “stabilize” in 2012 and to start declining in 2013.
The cuts may hurt Portugal’s
economic growth, which has averaged less than 1 percent a year in the past decade, compared with 1.3 percent for the euro region. The budget includes a forecast for growth of 0.2 percent next year, slower than an estimated expansion of 1.3 percent for this year.
Jorg Decressin, head of the International Monetary Fund’s world economic studies division, on Oct. 6 said that the Portuguese economy may contract 1.4 percent next year if new deficit-cutting measures are taken into account.
Standard & Poor’s said on Oct. 4 that it expects the Portuguese economy to shrink 1.8 percent next year and stagnate in 2012. Portugal probably won’t default on its debt even as the economy fails to grow in the next two years, S&P said.
(Bloomberg)
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