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Europe

Social Democrats inherit painful austerity agenda

Text by Joseph BAMAT

Latest update : 2011-06-06

The Social Democrats led by Pedro Passos Coelho (pictured) have defeated the Socialist Party in elections in Portugal, but they have also inherited the country's deep economic woes.

Social Democrat leader Pedro Passos Coelho, the future prime minister of Portugal, has promised to push ahead with austerity measures originally introduced by the defeated Socialist Party-led government.

Jose Socrates, who resigned as prime minister in March after his government failed to pass an austerity measures programme but stayed on in a caretaker capacity, said he was responsible for Sunday’s defeat at the ballot box.

However, victory for the Social Democrats is tainted by the country’s massive economic woes. Coelho acknowledged his new government faces a long and painful road to recovery in his victory speech:

"The years ahead are going to require much courage on the part of all of Portugal. This is going to be difficult but it is going to be worth it."

Portugal's public debt reached 92.4% of its GDP in 2010 and is expected to end 2011 at 97.3% GDP. Output is expected to contract around 2% in 2011 and 2012, according to government figures.

Analysts agree that the measures adopted in May to secure 78 billion euros in emergency loans from the International Monetary Fund and the European Union will take years to turn around Portugal’s stagnant economy. The wait is expected to hurt ordinary citizens but could also prove painful for Passos Coelho.

“We haven’t seen people in the streets of Lisbon like we have seen in Athens. This election gave [Portuguese] a way to express their dissatisfaction with the government,” said Jeremy Batstone-Carr, director of client research at the London-based investment firm Charles Stanley.

“The new administration will claim it has been given the legitimacy to implement the austerity measures... That doesn’t mean it will not see people banging pots and pans in front of parliament in the future,” Batstone-Carr added.

Painful measures

In May the then government of Jose Socrates sent the IMF a letter of intent, which described the policies that the country intends to implement in the context of its request for financial support. The letter outlines measures that include tax hikes, a freeze on state pensions and salaries and a reduction in unemployment benefits.

Through a policy of not replacing all civil servants who leave their post or retire, Lisbon expects to reduce the number government employees by 1% in both 2012 and 2013.

In addition, the Socrates government said it would suspend large infrastructure projects, providing no public funds for the construction of a new airport in Lisbon and a high speed train project.

Passos Coelho campaigned on a promise to "go beyond" the demanding bailout conditions negotiated by his predecessor in term of privatisations and economic reforms aimed at reducing the role of the state.

Adding debt to debt

Portugal is one of the 17 Eurozone countries. Its economy accounts for less than 2% of the bloc's GDP, but its fiscal troubles have aggravated investor fears about the stability of the eurozone in general.

Portugal’s bonds rallied after the political shift and on Passos Coelho’s promise that he would forge a coalition to meet conditions of the bailout.

"This result will be seen as positive by markets and investors," Filipe Garcia, head of the Portuguese consultancy Informacao de Mercados Financeiros, told Reuters. "It allows for stable government that can last the full mandate and that is positive."

However, some investors remained skeptical about Portugal’s chances of success amid the European-wide debt crisis. “You don’t solve a debt crisis by pouring on more debt,” said Batstone-Carr.

Speaking to the Irish daily The Independent on Sunday, former Lehman Brothers vice president Larry McDonald said that Ireland would eventually but “absolutely” default on its debt despite the 90 billion rescue package it secured from the IMF and the EU last year.
“It's not like Ireland will be the only one. I think Portugal and Greece and some others too possibly," McDonald said.

McDonald predicted the sub-prime crisis in the US in 2008. Passos Coelho will now hope to prove him wrong about Portugal’s debt.

Date created : 2011-06-06

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