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28th Mar 2024

Euro slides amid fears over Portuguese austerity package

  • Portuguese PM Socrates may have to depend on opposition conservatives to push through austerity measures, although they have yet to say which way they will vote (Photo: Consilium)

The euro slid to a 10-month low against the US dollar on Wednesday (24 March) following a downgrading of Portugal's credit rating by Fitch, a leading ratings agency, as investors fear that Lisbon will be unable to push through its draconian package of austerity measures and a European-led solution to the ongoing Greek crisis appears increasingly distant.

The European currency fell 1.3 percent to $1.33 against the dollar, a level not seen since May 2009.

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The drop came as Fitch downgraded Portugal's long-term default ratings to AA- from AA due to "significant budgetary underperformance in 2009."

"A sizeable fiscal shock against a backdrop of relative macroeconomic and structural weaknesses has reduced Portugal's creditworthiness," said Fitch's Douglas Renwick in a statement.

Following the move, the Lisbon stock market fell two percent. Meanwhile, the country's debt has now reached 76.6 per cent of GDP.

In order to avoid a similar situation to fellow eurozone member Greece, which is finding it increasingly expensive to borrow from money markets amid worries of a sovereign debt default, Portugal's centre-left Socialist minority government has proposed a sweeping package of cuts to assuage investor fears.

The government of Jose Socrates has announced plans to slash the public deficit from 9.3 percent of GDP to under three percent by 2013 by freezing government salaries, cutting social programmes and a blitz of privatisation of public holdings in 17 different enterprises.

The opposition conservatives have yet to say whether they will support the austerity package while the far-left Left Bloc and Communist Party, upon whose votes the government depends, have denounced the measures as "violent" and anti-worker and intend to vote against.

The government has in turn warned that a vote against the bill would effectively visit the Greek crisis upon the Iberian country as well.

"Under the current situation of nervousness and volatility in the international financial markets ...it is essential for Portugal to show a firm political commitment to implement its growth and stability programme," the finance ministry said in a statement in response to the ratings downgrade.

The euro slide also comes as European leaders prepare to meet in Brussels for their spring summit. They are expected to discuss how to make it easier for Athens to borrow money, although the EU's paymaster Germany now backs an International Monetary Fund solution to the crisis, which is also supported by a number of northern member states and France.

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