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29th Mar 2024

Portugal and Ireland inch closer to financial disaster

  • Portuguese PM Socrates had promised to resign if the austerity budget is rejected (Photo: Consilium)

Some of the weakest members of the eurozone are seeing their financial problems deepen, with Portugal failing to push through an austerity budget and Ireland saying it has to make further cuts.

Portugal's minority government on Wednesday (27 October) failed to reach agreement on the budget, with the main opposition party, the centre-right Social Democrats (PSD) formerly led by European Commission President Jose Manuel Barroso, walking out of talks.

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Markets reacted nervously - the yield spread between Portuguese 10-year bonds and similar German bonds widened to 3.287 percent from 3.175 percent the day before.

The Portuguese finance minister warned that if the budget is not passed: "the country will find itself in a serious situation with grave economic effects."

The highly-endebted country is trying to avoid a Greek-type EU and IMF bail-out. But Prime Minister Jose Socrates needs the opposition PSD to go along with his September austerity package. If parliament does not pass the measures by the end of next month, Mr Socrates may even resign.

The proposals for tax increases, including a VAT hike from 21 to 23 percent, and wage cuts are the most divisive issues.

Portugal has committed to reducing its deficit from 9.3 percent of GDP in 2009 to 7.3 percent this year and 4.6 percent in 2011. The deficit rule for euro-countries is three percent.

The country's president, Anibal Cavaco Silva, has called a meeting of the State Council, an advisory board that includes the prime minister, the speaker of the parliament and the head of the Constitutional Court, along with former premiers and presidents in order to get talks back on track.

Meanwhile, Ireland on Wednesday said it will double its previously-announced cuts or "budgetary adjustments" for the 2011-2014 period, from €7.5 billion to €15 billion.

"It is severe, but it is a necessary next step to economic recovery," Taoiseach Brian Cowen told the parliament.

He said the fresh cuts will hurt economic growth, but warned the country runs the risk of "not being able to borrow at all" if the steps are not taken.

The government blames the new spending cuts on lower-than-expected growth in the aftermath of the global crisis and the need to lower its record-busting deficit of 32 percent of GDP.

The uneasy atmosphere in the country is leading to speculation over government manoeuvres.

According to an unnamed official quoted by Reuters, Ireland's finance minister has been advised to allow the country's €24 billion state pension fund to buy Irish government bonds to boost demand. The minister denies this.

EU officials have also been forced to deny that the new round of cuts are not being dictated by Brussels. But EU monetary affairs commissioner Olli Rehn will travel to Dublin next week to meet government members, opposition politicians and trade union officials, in a bid to underline the seriousness of the situation.

For its part, Greece is likely to fail to meet the 8.1 deficit target for 2010 agreed with the EU and IMF.

The report, in the New York Times, saw Greek 10-year bond yields jump to 10.3 percent from 9.3 percent last week. The cost of insuring Greek bonds against a possible default also rose.

'Swiftly dial back' interest rates, ECB told

Italian central banker Piero Cipollone in his first monetary policy speech since joining the ECB's board in November, said that the bank should be ready to "swiftly dial back our restrictive monetary policy stance."

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