August 1, 2013 1:22 am

Portugal to ask lenders for leniency over austerity

closed clothes shop in Sintra, Portugal©Reuters

Sign of the times: a man walks past a closed clothes shop in Sintra, Portugal, which faces 10 months of spending cuts

Lisbon is expected to press international lenders for permission to ease up on austerity after a month of political turmoil that threatened to bring down the coalition government and derail the country’s €78bn bailout programme.

“The government is almost certain to push the EU and the IMF [International Monetary Fund] for more leeway on fiscal targets as a necessary condition for maintaining political stability and successfully completing the bailout,” a senior western diplomat in Lisbon said on Wednesday.

Pedro Passos Coelho, Portugal’s prime minister, has vowed to press ahead with tough spending cuts a month after tensions within the government over austerity triggered the resignation of two senior minister and plunged the country into crisis.

But his promise of a “new phase” in the rescue programme and measures to “relaunch the economy”, including big corporate tax cuts, indicate that Lisbon will seek to ease the pace of fiscal consolidation to prevent further potential rifts endangering the centre-right coalition.

Mr Passos Coelho has already signalled that Portugal may ask the troika of international lenders – the EU, IMF and European Central Bank – to relax next year’s deficit target.

Analysts say the fractures in the coalition highlighted by a month of political turmoil now make it almost inevitable that Lisbon will seek more time to meet agreed deficit goals. The troika has already twice relaxed previous fiscal targets.

“We expect some relaxation of the deficit targets for this year and next, [although] the troika is not likely to ease up significantly, especially ahead of the German election in September” said Ricardo Santos, an analyst with BNP Paribas.

The prime minister has sought to reassure investors and the troika that the political crisis has not shaken Lisbon’s resolve to complete its three-year rescue programme on schedule by next June and to regain full access to international capital markets.

“We will certainly not falter now,” Mr Passos Coelho told parliament on Tuesday. The remaining 10 months of the bailout programme would be “full of challenges and hard choices”, he said, but the government would make the “structural spending cuts” it had agreed with international lenders.

However, the prime minister gave more emphasis to measures to stimulate an economic recovery that would end the country’s worst recession for 40 years, making no specific reference to the €4.7bn in savings Portugal is committed to make over the next two years by cutting back public services and laying off state workers.

He said the government would press ahead with a long-awaited reform of corporate tax, cutting the effective rate that companies pay from 31.5 per cent today to 17 per cent by 2018. According to a study commissioned by the government, the plan could reduce projected tax revenue by €1.4bn over the next five years.

Mr Passos Coelho said the measure was essential to make Portugal internationally competitive in attracting foreign investment and to support a return to economic growth after three years of deep recession and record unemployment.

He said positive signs were also beginning to emerge that the economy was close to a turnround. Unemployment fell slightly in June for the second consecutive month to 17.4 per cent, Eurostat, the EU’s official statists agency, said on Wednesday.

The prime minister was speaking shortly before winning a confidence motion designed to legitimise a significant cabinet reshuffle. The ministerial changes are aimed at healing the split between the two coalition parties by giving the conservative Popular party (CDS-PP), the junior government partner, significantly more influence over economic policy.

Although the outcome of the vote was assured, given the coalition’s comfortable majority in parliament, it marked the prime minister’s survival after a month of political turbulence that had brought his government to the brink of collapse.

Vítor Gaspar, the chief strategist of Lisbon’s fiscal adjustment plans, triggered the crisis when he quit as finance minister on July 1, citing a loss of political and public support for tough austerity measures.

Paulo Portas, leader of the CDS-PP, resigned less than 24 hours later in disagreement with the prime minister on the appointment of Maria Luís Albuquerque, previously Mr Gaspar’s deputy, as the new finance minister.

A bid by President Aníbal Cavaco Silva to persuade the government parties to agree on a “national salvation” pact with opposition Socialists also failed.

Mr Portas has been made deputy prime minister with overall responsibility for economic policy and overseeing relations with the troika. António Pires de Lima, a senior CDS-PP politician, has also been appointed economy minister.

Mr Portas, the minister who insisted the government ease up on austerity and then announced his “irreversible” decision to resign, now has to persuade the troika of the validity of his arguments and find a way of working with a finance minister whose appointment he opposed.

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