© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
September 15, 2013 4:21 pm
Portugal begins a new round of talks with international lenders on Monday amid signs that eurozone governments will strongly resist pressure from Lisbon to relax fiscal targets as the country approaches the final stages of its €78bn bailout programme.
A successful outcome to the negotiations is seen as vital for Portugal to regain the confidence of international investors following a damaging political crisis in July and a third intervention by the constitutional court restricting the scope of government reforms.
But EU officials have rebuffed suggestions from Lisbon that easing next year’s budget deficit target for a third time would help Portugal exit its bailout on schedule by mid-2014.
The discussions with the “troika” of lenders – the European Commission, the International Monetary Fund and the European Central Bank – come amid expectations that Portugal will need additional international support after the current programme before it can regain full access to capital markets.
Yields on Portugal’s benchmark 10-year government bonds rose to 7.42 per cent on Friday – close to the peak of 7.51 per cent they reached at the height of the political crisis in July, when two senior ministers resigned. Analysts said this reflected investor fears that the country faced a “limited risk” of needing a second bailout.
Pedro Passos Coelho, the prime minister, is under pressure to relax austerity measures as his centre-right coalition faces its first election test since the bailout in local government polls on September 29 and prepares to present next year’s budget to parliament in October.
Comments last week by Paulo Portas, the deputy prime minister – suggesting that Lisbon would continue to press for a budget deficit target of 4.5 per cent of gross domestic product in 2014, a relaxation from the current 4 per cent goal – triggered a negative response from EU officials.
“I do not think it is a good signal to keep the discussion [on deficit targets] alive,” said Jeroen Dijsselbloem, head of the Eurogroup of finance ministers, adding that Lisbon should stick to what had already been agreed.
José Manuel Barroso, the European Commission president and a former prime minister of Portugal, said the recent political crisis made it important that the government did not seek to relax fiscal consolidation.
“What investors want to know is whether or not Portugal will meet the targets it has agreed to,” he said.
Mr Portas, head of the conservative Popular party, the junior partner in the ruling coalition, resigned as foreign minister amid the political crisis, highlighting a split within the government over what degree of austerity was politically and socially feasible.
But the prime minister persuaded Mr Portas to stay on in a more powerful role, giving him responsibility for co-ordinating economic policy, overseeing relations with the troika and drafting public spending cuts of €4.7bn over three years – the most crucial remaining reform for successfully completing the bailout.
“The [bailout] programme no longer commands popular support, the government is confronting serious reform-fatigue, and decision-making within the coalition has become more complex,” said Mujtaba Rahman, chief European analyst at the Eurasia Group risk consultancy.
Recent political developments, he said, suggested that after the current bailout, the government’s “only realistic choices” were an enhanced conditions credit line (ECCL) involving a bailout-style “memorandum of understanding” or, in a worst-case scenario, a full second bailout.
Lisbon’s insistence on relaxing next year’s deficit goal to 4.5 per cent of GDP led to three months of negotiations with the troika, which ended in May with agreement on a 4 per cent target.
Please don't cut articles from FT.com and redistribute by email or post to the web.
Sign up for email briefings to stay up to date on topics you are interested in