Thursday, April 7, 2011

Pain awaits Portugal as bail-out reality hits: pay cuts, a rising pension age, reduced welfare benefits

Portugal is facing the prospect of pay cuts, a rising pension age, reduced welfare benefits, labour market reforms and a bank recapitalisation as a "quid pro quo" for a multi-billion euro bail-out.

Public sector pay is already being slashed by 5pc and taxes are rising as the country grapples with crippling public debt of 93pc of GDP. Further proposals to shrink the 8.6pc budget deficit to 4.6pc this year that included benefit cuts, higher taxes, a pensions levy and lower redundancy payments were rejected by opposition parties last month, causing the government to resign and triggering the latest crisis.

On Wednesday, Portugal's interim Prime Minister Jose Socrates said he had bowed to the "inevitable" and requested a European bail-out. Analysts expect it to seek anything from €60bn to €90bn (£52.5bn to £79bn) of support, equivalent of half Portugal's GDP and roughly in line with the €85bn Irish package. Conditions attached to the rescue "would start with the measures already proposed", Elga Bartsch, chief European economist at Morgan Stanley, said.

Analysts said Portugal is caught in a debt trap as it will struggle to outgrow its borrowings. Its credit rating has been slashed to just above junk by Fitch, the credit rating agency.

The issue has come to a head because Portugal must raise about €14bn in the debt markets before the end of June, according to Giada Giani, European economist at Citi. Portugal is already paying about 6pc for one-year money, a price the government has admitted is unsustainable, and there are fears that it will be unable to find buyers to roll over its debts. (read more)