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How will it end? Portugal seeks bailout closure

Wednesday - 12/4/2013, 4:23pm  ET

In this picture taken Nov. 29 2013, a cargo ship sails up the Tagus river as the sun rises at Lisbon's Santa Apolonia docks. The European Commission predicts Portugal will return to growth next year, but only at a rate of 0.8 percent, and exports grew almost 10 percent over the 12 months to last September. (AP Photo/Francisco Seco)

Associated Press

LISBON, Portugal (AP) -- Portugal wants to look like Ireland, but it can't disguise its resemblance to Greece.

Inspectors from Portugal's bailout creditors arrive in Lisbon on Wednesday for a regular check of the country's fiscal health and its compliance with the stipulations of the 78 billion euro ($106 billion) financial rescue it received in 2011.

As in Ireland and Greece, which got bailouts the year before Portugal, the agreement demanded steep spending cuts and an economic makeover -- part of a continental effort to persuade wary investors to resume lending to some of the eurozone's debt-heavy countries.

With about six months to go before Portugal's rescue cash runs out, it's still unclear whether the Portuguese will be able to make it on their own after June.

The government insists it can follow the same path as Ireland, which will unhook itself from foreign financial support this month. But hurdles remain that could compel Portugal to ask for more help, like Greece did when it got a second bailout, and prolong Europe's debt woes.

Here is a look at some of Portugal's difficulties.


To woo hard-nosed investors, the country's financial figures have to look good. Though Portugal's numbers have improved, they're still not very seductive.

The interest rate Portugal has to pay holders of its 10-year bonds -- regarded as a reflection of investor confidence in the country -- is around 6 percent. That is too expensive in the long term for Portugal, though far better than the 17 percent that compelled Lisbon to ask for help. Germany, by contrast, pays less than 2 percent. Portugal's credit rating is still classified as junk by the three main rating agencies.

Budget deficit targets for this and next year were eased as a deep recession extended into a third year in 2013, prompting fears that Portugal, like Greece, was straying off the recovery track. The deficit fell to 6.4 percent of gross domestic product last year, down from 10.1 percent in 2010 but still a way off the desired 3 percent, now the target for 2015.

Unemployment is at 15.7 percent, and the European Commission forecasts it will climb to 17.7 percent next year. Government debt is expected to peak at almost 128 percent of GDP this year, the third highest in the European Union.

The bright spots: The European Commission predicts Portugal will return to growth next year, but only at a rate of 0.8 percent, and exports grew almost 10 percent over the 12 months to last September.


All three of Portugal's main political parties gave their blessing to the initial bailout agreement in a sign of broad consensus welcomed by creditors. But the unity came apart as austerity policies brought hardship.

The center-right coalition government and the main opposition center-left Socialist party are now at loggerheads.

Prime Minister Pedro Passos Coelho says that by abiding by the terms of the bailout his government is creating a nimbler, stronger economy. Socialist leader Antonio Jose Seguro says the austerity measures are corroding the economy and the welfare state.

An early summer political crisis, which saw the finance minister and foreign minister resign in a spat over the scale of austerity, rattled financial markets.

The government has a majority in Parliament that allows it to pass the bailout measures. Its political capital is depleted, however, as this fall it has faced another uptick in strikes and protests.

After sales tax jumped to 23 percent from 13 percent in 2011, and after what the government conceded was an "enormous" increase in personal income taxes this year, more chafing austerity is due in 2014.

Unlike the rioting in Athens, protests in Portugal have been peaceful like those in Dublin. Even so, a demonstration by police that broke through a cordon around Parliament this month suggested the government is skating on thin ice.


Portugal's Constitutional Court has been the government's bugbear.

Its 13 judges have four times in two years disallowed planned cuts, leaving the government with budget holes amounting to some 1.7 billion euros.

Another standoff is looming: the judges are expected to rule by the end of the year on the legality of cuts to the pension entitlements of government workers, and of widows and widowers. That's another 800 million euros of savings at risk in the 2014 budget.

Ricardo Mamede, a Lisbon University professor of political economics, sees a bigger threat from the slowness of European Union leaders to enact new financial rules that might prevent a repeat of the crisis. Proposals such as establishing procedures for saving troubled banks have fallen foul of political quarrelling as member countries fret about surrendering sovereignty.

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