Portugal Announces More Spending Cuts, Reforms

Reuters

Portugal announced additional spending cuts and reforms on Friday to cut its deficit by an extra 0.8% of gross domestic product this year in an attempt to stave off intense pressure to take a bailout.

Finance Minister Fernando Teixeira dos Santos spelled out a raft of measures including spending cuts on health services, social welfare and delaying infrastructure projects, which he said would guarantee the government will reach its target of a 4.6% fiscal gap this year.

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"As an additional precaution for 2011, the consolidation measures will be strengthened, allowing us to have an additional effect of 0.8% (of GDP)," he told reporters in Lisbon, shortly before a key euro zone summit designed to help resolve the debt crisis.

He added that the measures ensured "there will be no doubts" about the debt-laden country meeting its 2011 deficit target.

Teixeira dos Santos said Lisbon would seek to deepen structural reforms, particularly in the labour market, where it plans to cut layoff compensations to 10 days from 30 days and set a maximum compensation payment limit worth 12 months' pay.

"The ongoing consolidation effort, now complemented with additional measures for 2011, has to be followed by measures in the following years given the demand targets set," he said.

Markets were little moved by the announcement.

"I think this is Portugal still desperately trying to prove that it has the political will to push through these painful measures, said Colin Ellis, chief economist at BVCA in London.

"Ultimately however, the interest rates they're paying in the market are unsustainable, there's still a good chance they will need some support at some stage."

Bond market pressure on Portugal to become the third euro zone state to seek an EU/IMF rescue after Greece and Ireland has intensified this week with 10-year bond yields at euro lifetime highs above 7.5%, a level Lisbon says is unsustainable.

Despite insisting it will not need outside help, Portugal has urged European Union leaders to come up with a package of measures to draw a line under the debt crisis quickly.

Euro zone leaders meeting in Brussels later are set to agree rules to constrain national debts in the future and are expected to keep the pressure on Portugal to put its house in order.

But Germany has lowered expectations for a major breakthrough at the summit, saying the best that can be hoped for is an agreement on competitiveness. Bigger decisions to tackle the crisis -- such as whether to strengthen the euro zone bailout fund -- will be handled at an end-March summit.

The Portuguese government targets cutting the budget deficit to 3% of GDP next year, and further to 2% in 2013.