Euro crisis: No let-up in Lisbon’s belt-tightening

The crisis-battered Portuguese have had to suffer a lot this month. First, ratings agency Moody’s downgraded the country’s creditworthiness by four notches to junk. Then the government discovered another hole in the budget worth two billion euros. As a result, the Portuguese will need to tighten their belts even further. In addition, the country faces another hard recession. According to the central bank in Lisbon, the economy will shrink this year and next, due to various austerity measures, with private consumption set to suffer particularly. Portugal has been promised 78 billion euros of assistance by the EU and the IMF. The Portuguese people hope this will be enough. Portugal’s bid to stop the rot The government has cancelled Christmas, some are saying! Unions in debt-ridden Portugal are up in arms at the decision to impose a one-off tax equal to 50 percent of the festive bonus. Santa Claus may not approve but it should bring one billion euros into state coffers and demonstrate Lisbon’s eagerness to reimburse its international bailout. Urgent action is needed. Portugal’s public debt represented 93 percent of gross domestic product in 2010. This year, the debt is expected to surpass 100 percent of GDP and rise further in 2012. In his first European summit after June’s election, Portugal’s new premier was keen to show his country can react more quickly than Greece. “We won’t rest until we have repaid the trust put in us,” Pedro Passos Coelho said. “I can assure you we are doing everything in our power, with the European Commission, the ECB and IMF to make a success of the austerity programme.” After three austerity plans from the former Socialist government, the new centre-right coalition must now pursue further tax reforms, cuts in state spending and privatisations in return for the rescue. Such decisions risk exacerbating the social cost of the crisis with unemployment set to rise from 12.5 percent this year to more than 13 percent in 2012. The number of people earning the minimum wage has doubled in the last six years. The main challenge is boosting growth. The economy has been virtually stagnant in recent years and looks set to contract, at least in the short-term. Hence doubts in the financial world over Lisbon’s ability to repay its 78 billion euro loan without new austerity measures and a new bailout. Giving investors even greater jitters, Moody’s has lowered Portugal’s credit rating to junk status. Some in Lisbon decided to return the compliment, symbolically putting junk from the city’s streets in the post to be sent direct to Moody’s in New York. ‘Slow growth is not generating many resources to enable the debt to be paid’ – analyst To help understand Portugal’s plight in the euro zone crisis, euronews spoke to former IMF economist Professor Álvaro Almeida of Porto University’s Economics Faculty. Filipa Soares, euronews: “Portugal and Brussels have criticised Moody’s decision to cut Portugal’s credit rating to ‘junk’. Why this indignation?” Álvaro Almeida: “I think it is a bit exaggerated because what Moody’s is saying, with its rating, is that there is a non-negligible probability of a partial default by the Portuguese government, as far as its debt is concerned. I think that is a reality. “There is that possibility, only as far as private lenders would be required to participate in the financing of the euro zone countries which have had bailouts. If that happens, those lenders will suffer a loss and, so, there will be a partial default.” euronews: “Taking into account Portugal’s normal rate of growth, will it have the money to pay the interest on the EU-IMF loan?” Álvaro Almeida: “That is one of the risks and it is why that probability of not having enough money exists. Indeed, in the last decade, Portugal has had a very slow growth rate, one of the slowest in the world, and this slow growth is not generating many resources to enable the debt to be paid. “If the debt is growing and the resources to pay the debt don’t grow, the probability of it not being possible to pay exists. It does not mean it is the most likely possibility but it is one we can’t neglect.” euronews: “Having taken part in negotiations for IMF aid to Mexico, Armenia and Venezuela, how do you evaluate the aid programme for Portugal? Is it enough or will Portugal need more help soon, like Greece?” Álvaro Almeida: “If the programme is implemented as it is designed to be done, I think it will be enough. But Portugal’s programme is different compared to other IMF programmes: it is very demanding, especially in the first six months, which correspond to the second semester of 2011. “During that period, a large number of measures must be implemented and, if we consider that this is a new Portuguese government, it might be hard to carry out so many measures in such a short period of time. That is the big risk, in my opinion, but if those measures are implemented, if the programme is well implemented, I think it will be successful.” euronews: “Judging by the measures taken so far, is the new government on the right track or not? Álvaro Almeida: “The government is on the right track, because everything it has done so far goes in the direction of what is in the programme. There are even measures that go beyond this, like the extraordinary tax on individuals’ income, which is going to increase state revenues to a level which was not in the programme. “So, the government is taking budget restraint measures that are in line and beyond what is in the programme, but it is too early to know. The government has been in office for just a month and so it is too soon to evaluate if the programme is going to be well implemented or not.”