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Austerity ruling puts Portugal in a bind

Centre-right government says court's budget measures rejections make it difficult to make cuts promised to creditors.

Last Modified: 06 Apr 2013 21:11
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Luis Marques Guedes says that the court ruling will have a negative impact on Portugal's austerity programme [EPA]

Portugal's government says the constitutional court's rejection of austerity measures from this year's budget creates serious difficulties in meeting international bailout commitments.

Luis Marques Guedes, state decretary for cabinet affairs, said on Saturday that the decision "jeopardises the country's hard-earned credibility" gained with its European partners and lenders and would have a negative impact on the austerity programme under way.

He said that  Pedro Passos Coelho, the Portuguese prime minister, had requested an emergency meeting with President Anibal Cavaco Silva to discuss the complex situation.

The court ruled late on Friday that some of the unpopular pay cuts in this year's state budget were unlawful, denying the government about 1.4bn euros ($1.8bn) of predicted revenue.

The government said that it would accept the ruling after it held an extraordinary cabinet meeting on Saturday.

The constitutional court's decision delivers a setback to the austerity strategy agreed between the government and foreign creditors who lent Portugal 78bn euros ($101.5bn) in a bailout two years ago.

Heavy blow

The court rejected four out of nine contested austerity measures in this year's budget in a ruling that deals a heavy blow to government finances.

The 13 judges said in a written statement that budget measures cutting holiday pay for government workers and pensioners, and others reducing unemployment and sickness benefit, were unconstitutional.

However, analysts expect replacement measures to be found with the EU and International Monetary Fund.

The government would not provide estimates for how much the rejected measures was worth, but analysts have said at least $1.17bn in net revenues and savings are compromised. Some local media put the figure as high as $1.7bn.

The entire package of austerity measures in the 2013 budget was worth about $6.5bn euros ($8.4bn) and included the largest tax rises in living memory, which were mostly upheld.

Eurozone meeting

The court's decision came before an informal meeting of euro zone finance ministers next week in Dublin where they were expected to approve extensions of loan maturities for Portugal and Ireland.

"Portugal has been fighting to reach, at this meeting, agreement with European partners for the extension of its bailout loan maturities, which is essential for our successful exit from the bailout programme in 2014," Marques Guedes said.

Armenio Carlos, secretary-general of the CGTP, Portuguese workers' general union, said that the government had no right to present alternative measures after the court's ruling.

Lisbon has to cut the budget deficit to 5.5 percent of gross domestic product this year from 6.4 percent in 2012.

Lenders have eased Portugal's deficit goals twice since the rescue package was agreed and recognised the country's consolidation efforts.

Portugal returned to the bond market for the first time since its 2011 EU/IMF bailout in January, selling debt due in
2017.

It has been preparing a longer-maturity bond issue for the coming months.

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Source:
Agencies
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