Portugal up-beat over bailout

Portugal's new prime minister, Pedro Passos Coelho, has again expressed his willingness not only to fully abide by the terms of the EU/IMF €78 billion bailout, but go beyond them.

His government has just confirmed that it will be “more ambitious” than strictly required in cutting the country's budget deficit. Its stated intention is to exceed the bailout requirements under which Portugal must cut its budget deficit to 5.9% of gross domestic product this year from more than 9% in 2010.

The government, which only took office last week, has drawn up a four-year programme, but has not yet announced details. Among the most immediate measures will be selling state-owned assets, including the national airline TAP, reducing social security contributions made by companies, making it easier for employers to dismiss workers, and increasing value-added tax on certain products to as much as 25%.

Passos Coelho has said that he wants to go beyond the requirements of the bailout agreement to create “a wave of confidence in the markets.”

The four-year programme announced today will be elaborated upon and discussed in parliament on Thursday and Friday. Meanwhile, Passos Coelho is filling key posts with a surprisingly large number of independents rather than members of his own PSD party or that of his coalition partners, the CDS-PP. Four of his 11-member cabinet are independents. Of the 35 new secretaries of state who take up their posts today, 15 are independents. Only 12 are aligned to one or other of the coalition partners.

This is all in contrast to the confusion and tensions in Greece. While there is much public unease and union opposition in Portugal to the forthcoming austerity measures, there has been far less political wrangling and none of the street violence evident in Athens. Indeed as a measure of the prevailing mood, the hundreds of cyclists who took part in a 'Naked Bike Ride' in Lisbon, part of an international effort to promote environmental issues, abided by a police modesty order. The 'naked' bikers were less revealing than many ordinary holidaymakers on Algarve beaches.

Big week: Finally Friday

It has been a critical week in the political and financial affairs of Portugal and it is ending on a fairly positive note. Both the new prime minister, Pedro Passos Coelho, and former prime minister José Manuel Barroso, now president of the European Commission, are convinced there is broad support among Portuguese people and politicians for the the EU/IMF bailout, despite all its tough reforms and austerity measures.

During the EU summit meeting in Brussels, Barroso noted that "about 85% of the Portuguese people supported the political parties that agreed with the European Commission, the European Central Bank and the International Monetary Fund and agreed on an ambitious and demanding reform program."

Barroso added: "The 'troika' visited Portugal and made contact with the Portuguese authorities and came back with a very positive report. And I hope that spirit and that cooperation will continue in the tasks to come.”

Said Passos Coelho: “Portugal has all the conditions in place to make this program a success." He announced today in Brussels that his coalition government is preparing to accelerate and possibly broaden the austerity measures Portugal has promised in return for a €78 billion bailout. He said he was also considering a swifter reorganisation of loss-making state companies, adding that he would give details of his plans next week.

The prime minister flew to Brussels economy class instead of business or first class. “It's about setting an example, and I'll stick to that,” he said. When asked if travelling economy class would apply to all Portuguese government officials, Passos Coelho said: "Certainly".

The news from Brussels today is not all heartening, of course. While EU leaders reaffirmed their determination to stabilise the euro currency, the likelihood of a Greek debt default remains. Default could seriously undermine confidence in the single currency.

The EU cannot make a decision on the second bailout for Greece and a more immediate injection of €12 billion to stave off insolvency until the Greek parliament votes on a new package of spending cuts and tax hikes. That comes next week. Today, EU leaders unanimously urged all Greek politicians to back the austerity measures.

Big week: Thursday in Brussels

EU leaders are meeting in Brussels today amid concerns that the fate of the single currency may be in the balance and that Europe may be slipping into the sidelines of globalised affairs. 

"We're at a critical point in the most serious crisis since the Second World War," warned Olli Rehn, the European commissioner for monetary affairs.

German Chancellor Angela Merkel, the most influential figure in the crisis, has expressed confidence that Europe will rise to the challenge.

The situation in Portugal will be discussed in Brussels informally today but the focus will be more on Greece. To secure a second bailout of more than €100 billion and an immediate €12 billion lifeline to avoid insolvency, the Greek government must approve a package of severe spending cuts and national assets sales in the face of fierce public opposition in Athens. Failure could have immense implications for Portugal and other countries within the EU – and perhaps for the euro itself. Today, however, is not decision day on this.

Prime Minister Pedro Passos Coelho yesterday ordered that the tickets for himself and four staff members flying from Lisbon to Brussels today be changed from executive to economy class. Another measure of just how serious the new Portuguese government is taking the crisis is that ministers in the new cabinet have been told their summer break in August will be limited to one week. Members of parliament can only take a fortnight off.

Big week: Wednesday in Lisbon

Change is in the air. For the first time in the history of democracy in Portugal, a woman has been elected president of the parliamentary assembly. Maria da Assunção Esteves, 54, formerly a constitutional court judge and member of the European Parliament, now occupies the second highest office in the land after the head of state, President Aníbal Cavaco Silva. Her election yesterday was endorsed by all parties.

With inauguration formalities now behind them, Portugal's new government led by Prime Minister Pedro Passos Coelho today gets down to the immediate challenges of bringing the country's public finances under control.

In his inaugural speech after being sworn in by President Cavaco Silva yesterday, Passos Coelho summarised the government's priorities: stabilising public finances, helping the most needy, making the economy grow and creating employment.

"The goal of returning to a sustainable path in public finances is an urgent imperative to face our short-term problems,” said the prime minister. He promised not to fail.

Replacing the former minority Socialist government that was forced to resign over the bailout issue, Portugal now has a right-of-centre government made up of Social Democrats in coalition with the smaller CDS-PP party, which will govern with a comfortable majority in parliament.

The nicities are over. Now for the tough stuff. The government is expected to swiftly introduce new austerity measures and economic reforms as demanded by the €78 billion bailout.


Dr Richard Wellings, quoted on the PS Public Service Europe website, today offers the following opinion.

It now seems almost certain that Greece will be subject to some kind of second bailout. Attention may then turn to Portugal and Ireland, the other countries being supported by the European Union and the International Monetary Fund. Both still face enormous difficulties, but their circumstances are very different. 

The main problem Portugal faces is long-term economic stagnation. Growth averaged less than 1 per cent in the last decade. Vast EU subsidies have done little to stimulate business activity. Instead, they enriched special interests with close links to the political elite and enabled the government to ramp up welfare spending, which reached a massive 22.5 per cent of GDP in 2007.
Membership of the eurozone exacerbated the problem. Spending could carry on rising without the checks and balances that markets would have imposed in the absence of an implicit EU guarantee of government debt. At the same time, ill-fitting monetary policies created inflation that made Portuguese businesses uncompetitive. Enterprises were also burdened with expensive new regulations, both from the European Commission and domestic policymakers.
Like Greece – and also Spain – Portugal will have to undergo a very severe adjustment to regain its international competitiveness. But such necessary rebalancing will be hampered by these high levels of regulation. In particular, labour market controls make it more difficult to reduce wages, and instead mass unemployment may result.
While Portugal's debts are not particularly high by international standards, the markets lost confidence in the government's ability to undertake the necessary reforms. If economic stagnation continued it would prove extremely difficult for Portugal to cover the interest payments on its debts.
The bailout has staved off the prospect of default for the time being but there must be a serious question mark over whether the new Portuguese government will be able to push through liberalisations radical enough to transform the country's prospects. Worryingly, a second Greek bailout may set a dangerous precedent that makes it even harder to gain political support.
See: http://www.publicserviceeurope.com/

Big week: Tuesday in Lisbon

Portugal's new government officially starts running the country today. The new prime minister, Pedro Passos Coelho and his 11-member cabinet will be sworn in by President Aníbal Cavaco Silva.

The government's most pressing task will be to implement the stringent terms of the EU/IMF €78 billion bailout agreement. But even before taking office, Passos Coelho has suffered the embarrassment of parliament rejecting his party's first choice of as leader of the assembly, Fernando Nobre, an independent.

"I am sad that Parliament decided not to take the step to select a true independent to head it," Passos Coelho said yesterday. Parliament will vote on an alternative candidate later today.

A spot of good news: Portugal's budget deficit continued to fall sharply last month from a year ago, according to the ministry of finance in Lisbon. Investors and authorities from the European Union and International Monetary Fund are obviously keeping a close eye on the figures. Last year, the country's deficit was 9.1% of gross domestic product. Under the terms of the EU/IMF bailout, Portugal is committed to cutting its deficit to 5.9% of GDP in 2011, to 4.5% in 2012 and to 3% in 2013.

The news is mostly bad, though. The professional services agency Ernst & Young is describing Portugal’s bailout as “a temporary oxygen balloon” . Other analysts say the €78 billion loan is just a short-term solution to cover upcoming deficit repayments. Portugal’s structural problems (weak competitiveness and low economic growth) remain unaltered.

Like the air temperature in the Algarve, which is forecast to soar in the next couple of days, the political climate in Portugal is about to hot up.

Big week: Monday in Luxembourg

Eurozone finance ministers meeting in Luxembourg have failed to agree on releasing a loan payout to spare Greece from default. There is talk of Portugal being dragged further into the mire because of Greece's problems.

Greece is awaiting €12 billion earmarked for July as part of the country's €110 billion bailout negotiated last year. But Europe's finance ministers are insisting that the Greek government first introduce laws to cut the country's deficit and sell state assets.

This demand comes amid mounting domestic opposition, including a three-day parliamentary debate over a no-confidence vote that could bring down the government of Prime Minister George Papandreou.

Said Luxembourg's Prime Minister Jean-Claude Juncker who is chairing the eurozone meeting: “We forcefully reminded the Greek government that by the end of this month they have to see to it that we are all convinced that all the commitments they made are fulfilled.”

The Greek crisis is expected to dominate the EU summit in Brussels on Thursday and Friday this week. Fear of further contagion remains high. Germany is increasingly seen as the vital bulwark against an uncontrolled spiral of default in Europe.

There is growing speculation in financial circles that the 17-nation eurozone will not be able to survive in its present form. There are suggestions that Greece could be forced to leave as early as 2013. Portugal and Ireland may follow. Of course, at this stage it is only speculation. 

Big week for Portugal and eurozone

It's the start of another big week in the midst of the current economic and financial crisis. Eurozone finance ministers are meeting in Luxembourg today and tomorrow. Portugal's new cabinet under Prime Minister Pedro Passos Coelho will convene on Tuesday. The prime minister will then attend a key European Union council meeting in Brussels on Thursday and Friday.

The new government here faces the massive initial task of navigating the country through what Coelho has referred to as two “terrible years” of deep recession and record unemployment.

At least the right-of-centre Social Democrats in coalition with the conservative CDS-PP party can look forward to a comfortable overall majority in the 230-member parliament. Coelho has kept to his promise and reduced the cabinet from 16 ministers under the previous Socialist administration to just 11 - four from the PSD, three from the CDS-PP and four independents.

One of the independents is Vítor Gaspar, the new finance minister. An economics professor, Gaspar has worked as a research director at the European Central Bank, led the European Commission's Bureau of Policy Advisers and most recently been a special adviser to Portugal's central bank. He will need all his experience and expertise in the daunting task he has taken on.

The main focus of the new government's work will be administering the tough and broad-ranging conditions of the EU/IMF rescue package, a consequence of a debt that had risen by the end of 2010 to €160 billion and a deficit for the year of 9.1 percent of GDP, more than triple the permissible EU rate first breached by Portugal back in 2002.

The meeting of EU finance ministers in Luxembourg is being dominated by the crisis in Greece, but they will also be taking stock of the Portugal's €78 billion bailout. Economic policy will again be top of the agenda in Brussels on Thursday and Friday. Warning that the ongoing debt crisis could spread to Italy and Belgium, Jean-Claude Juncker, who is chairing the eurozone finance ministers'' meeting, reportedly said yesterday: "We are playing with fire.”

In the light of the acute difficulties in Greece, one commentator said the other day: “Continuing to agree last-minute emergency measures to avoid the immediate collapse of a eurozone country is unlikely to create financial trust. And it is even less likely to create the required political trust to effectively tackle the crisis at its root. The EU heads of government and above all Merkel (the German Chancellor) need to take over the agenda and set out a credible narrative for a sustainable and prosperous eurozone or face the inevitable consequences.”

There has been an upsurge in fears about a possible collapse of the euro. Mind you, there has been talk of that ever since the common currency was introduced more than a decade ago.