Mon, Nov 12, 2012 - Page 9 News List

Lisbon hopes to deliver success story to Merkel

Portugal is edging closer to returning to bond markets, but protests and strikes are more common amid fears of poverty

By Axel Bugge  /  Reuters, LISBON

It accepted them in the end, but there is growing unease that the third year of recession that will come next year could send Portugal into a recessive cycle, with more budget cuts needed to meet fiscal goals, deepening the economic slump.

Unemployment is already at record highs above 15 percent and is set to rise further.

The government has forecast a contraction of just 1 percent in GDP next year, widely seen as too optimistic by economists, after a decline of 3 percent this year.

“This forecast corresponds to the best that may happen if everything goes well,” said Teodora Cardoso, the head of an independent body that monitors the budget, last week.

The government has already announced plans to identify 4 billion euros in long-lasting spending cuts from next year to 2014. These are not yet part of the bailout, but will be discussed in the review and IMF experts have helped in the process of identifying what cuts to be made.

The Portuguese fear more reductions in spending will chip away even more of the dwindling welfare state, which has already seen large cuts to health, pension and unemployment benefits.

“I try to be as optimistic as I can,” said Carolina Muniz, 20, a medical student. “Still, with these spending cuts, they must be very careful in some areas, like health. We could be talking about how far and how long we go in treating people with cancer, for example.”

Analysts say spending cuts have so far only dented people’s living standards, but more austerity may have more far-reaching effects, driving up poverty in western Europe’s poorest country.

“If the austerity measures fail again in delivering the desired result, levels of opposition and social strife could reach unacceptable levels,” said Pedro Magalhaes, political scientist at the Social Sciences Institute of Lisbon University.

Markets have paid little attention to the growing economic troubles, driving benchmark 10-year bond yields sharply lower this year, to about 8.7 percent now from above 17 percent in January, when fears of default gripped many investors.

That has raised hopes the country can return to the bond markets in the second half of next year as envisaged under the bailout. Portugal managed to swap shorter-term debt for longer bonds in a 3.76 billion euro operation last month, but still faces an uphill struggle.

“The main challenge for Portugal is to demonstrate growth that would start to reduce the debt to GDP ratio, that it is no longer locked in the recession-fiscal retrenchment cycle,” London-based Deutsche Bank economist Gilles Moec said. “Before that, there is not much sense in returning to the debt market.”

Additional reporting by Stephen Brown, Noah Barkin, Daniel Alvarenga, Andrei Khalip and Sergio Goncalves

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