Portugal Plans Deeper Spending Cuts To Keep Bailout On Track

Portugal 040813

Portuguese Prime Minister Pedro Passos Coelho said on Sunday that the government will have to reduce spending on social security, health and education to meet its bailout conditions after the constitutional court ruled against some of the austerity measures announced in the budget.

New spending reduction plans are crucial for the country to retain the access to its EUR 78 billion EU-IMF aid package, but the government does not favor any tax increases.

The government is forced to find new sources of savings after the Constitutional Court last Friday struck down four out of the nine measures that include plan to cut public employee wages and retiree pensions, and reduction in unemployment benefits.

The ruling will reduce the planned savings of the government by EUR 1.3 billion. The court ruling is a blow to the government's efforts to improve financial position ahead of the completion of the seventh review of the aid plan.

Any delay in concluding the review will cut off the disbursement of EUR 2 billion from the troika - the European Commission, the European Central Bank and the International Monetary Fund.

"We have to do everything possible to avoid a second bailout," said Passos Coelho said in Lisbon.

The government targets to cut its budget deficit to 5.5 percent of gross domestic product this year from 6.4 percent in 2012. According to the bailout terms, it has to reduce the deficit further to 3 percent in 2015.

The European Commission said it welcomes that the Portuguese government has confirmed its commitment to the adjustment programme. It is a precondition for a decision on the lengthening of the maturities of the financial assistance to Portugal, the commission said in a statement.

"Getting further measures through a fractious Parliament will not be straightforward and the Portuguese will hope that Friday's Eurogroup meeting, which was in any case was due to discuss changes to the repayment terms of Ireland's and Portugal's bailout, will cut it some further slack," analysts at Daiwa Capital Markets Europe said.

"But with Portugal having already been granted two extensions to its initial deficit targets, the mood surrounding bailouts having seemingly hardened over recent weeks judging by the Eurogroup's actions towards Cyprus, and Portugal's debt-GDP ratio in any case due to rise above 120 percent of GDP, the Portuguese can't expect too much from their euro area partners."

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