Portugal denies bailout pressure, approves austerity measures

Two days after Portugal staged a crippling general strike, its parliament adopted unpopular spending cuts which it says will save the country from financial ruin and keep it from seeking an international bailout.


REUTERS - Portugal approved its 2011 austerity budget on Friday, vowing to spur growth and apply tough spending cuts as it seeks to avoid an Irish-style bailout.

Parliament adopted the budget hours after a Financial Times Deutschland report said that most euro zone countries and the European Central Bank (ECB) were pressing Lisbon to seek an international rescue package as Greece and Ireland had done.

But Prime Minister Jose Socrates said the budget’s passage, which concluded many months of political bickering which at one point threatened the government’s survival, removed Portugal from the crosshairs of the euro zone crisis.

Socrates told reporters that the budget approval will allow Portugal to leave “the centre of a large-scale financial crisis”. He said the budget placed Portugal among the countries with the lowest budget deficits in Europe next year.

“As of now, the government’s priorities is meeting the budget and boosting growth,” he said.

"Portugal has strong economic fundamentals"

Portugal’s risk premiums, measured by its 10-year bond yields compared to safer German Bunds, had hit record highs this week as concerns rose after Ireland requested a bailout.

The spread rose 10 basis points to 464 basis points on Friday before parliament passed the budget, but declined later to 447 basis points. The country’s PSI20 stock index slid 0.6 percent with banks leading the decline.

Earlier on Friday, the FT Deutschland said a majority of euro zone states and the ECB were leaning on Portugal to follow the example of Ireland and Greece and seek aid from the European Union and International Monetary Fund.

A government spokesman said “this news article is completely false” while European Commission President Jose Manuel Barroso, a former Portuguese prime minister, said there was no talk of a bailout for his home country.

Barroso says bailout talk ‘absolutely false’

“I can tell you that it’s absolutely false, completely false,” Barroso said in Paris, adding that an aid plan for the country had neither been requested nor suggested.

Economists have said Portugal is the likely next weak euro zone country to need a financial helping hand as it struggles with low competitiveness and a high budget deficit. A Reuters poll of economists this week found a majority expect a bailout.

“The market is now assuming a bailout for not just Portugal but also Spain, but it is moving slowly with the officials reluctant to concede it will happen,” said Peter Chatwell, a rate strategist for Credit Agricole in London.

Chatwell said the “the market does not really see a timeline for this,” adding that pressure will continue in debt markets.  “There is no announcement expected this weekend.”

Socrates has repeatedly denied that his country needs a bailout and has underlined that Lisbon will do everything possible to meet goals to cut the budget deficit.

Finance Minister Fernando Teixeira dos Santos said in an interview with the daily Jornal de Noticias that some countries in the euro zone think the best way of defending the euro is to push countries to seek aid.

“I don’t want to refer to this or that country, much less Germany,” Teixeira dos Santos told the newspaper when asked if Germany was pushing Portugal to ask for aid.

“But there (are) among our partners in the European Union those that think that the best way of preserving stability in the euro area is to push and force those countries that have been in the spotlight to seek aid,” he said.

Ireland’s government resisted seeking aid initially until it decided last weekend to go to Brussels.

The Portuguese budget aims to cut the deficit to 4.6 percent of gross domestic product next year from 7.3 percent this year.  It includes measures such as a five percent cut in civil servant wages and hike in value-added tax to 23 percent from 21 percent.

Portugal’s budget deficit is considerably lower than that of Ireland and it has none of the banking problems of Dublin. But Lisbon has still been targeted by investors as possibly needing a bailout because of its spiralling debt costs.

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