Portugal Other


Portugal: Portuguese government under pressure after general strike and weak fiscal numbers

November 24, 2010

Latest reports show that the Portuguese socialist government has not yet delivered on earlier pledges to tackle the fiscal deficit. According to recent government figures, in the first ten months of the year, the budget deficit increased by 1.8% over the same period last year. The increase indicates that the 7.3% of GDP deficit target set for this year is unlikely to be reached. Last year, the fiscal deficit reached 9.3% of GDP. Nevertheless, Finance Minister Teixeira dos Santos reaffirmed the government will do everything to meet the target this year and to reduce the deficit to 4.6% of GDP in 2011. On 26 November, the parliament approved the final budget for 2011. The measures aimed at cutting spending and increasing revenues such as public sector wage cuts and a VAT hike from 21% to 23% prompted unions to call for a general strike on 23 November, the biggest in 22 years. Workers protested against the government's delayed response to restore confidence in the Portuguese economy in order to avoid a Greek/Irish-style bailout. Investors, who were still nervous even after the approval of the Irish rescue pack have turned their focus on the southern periphery and continued selling Portuguese bonds, driving up spreads to new historical highs since the adoption of the euro. On 26 November, Portuguese bond yields traded at 7.17%, which represents a 4.43 percentage points spread over German bonds at a similar maturity level. That said, if high borrowing costs persist, the country could be forced to activate an EU/IMF recue plan going forward. Consensus Forecast panellists see the fiscal deficit narrowing in 2011, but only to 4.9% of GDP.

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