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Fri, Mar 26, 2010 - Page 10 News List

Portugal vows austerity after debt downgrade

SHOCKWAVEFitch Ratings said although Portugal’s belt-tightening measures were ‘credible,’ it lowered its long-term credit rating because of an increase in its public debt

AFP , LISBON

Portugal on Wednesday appealed for parliamentary backing for its austerity program after a downgrade in the country’s creditworthiness that sent a new shockwave across the eurozone.

The minority Socialist government called for “unequivocal” support from lawmakers on the eve of a vote on a resolution on its four-year plan and just days before it is formally to be presented to the European Commission.

Although Fitch Ratings agency said it considered the government’s belt-tightening measures to be “credible,” it decided to lower Portugal’s long-term debt rating by one notch because the public deficit exploded last year.

Reacting to the downgrade, Portugese Finance Minister Fernando Teixeira dos Santos said there was “no need” to propose additional austerity measures.

He also warned that if the vote, scheduled yesterday, failed, “economic players would not believe in our ability to correct the deficit and control the debt, which would undermine confidence and would compromise the prospects for our economy.”

The credit downgrade on Wednesday, coupled with persistent concerns about the debt crisis in fellow eurozone member Greece, sent the euro plunging under US$1.34 for the first time in more than 10 months.

The move also came one day before a EU summit set to be dominated by debate on helping Greece, whose debt blowout has triggered a crisis in the eurozone.

“A sizeable fiscal shock against a backdrop of relative macroeconomic and structural weaknesses has reduced Portugal’s creditworthiness,” Douglas Renwick, associate director in Fitch’s Sovereign team, said in a statement.

Portugal has not been disproportionately affected by the global economic crisis, but its recovery prospects are weaker than other EU countries, “which will put pressure on its public finances over the medium term,” he said.

The Lisbon stock market plunged more than 2 percent after Fitch downgraded Portugal’s long-term foreign and local currency Issuer Default Ratings (IDR) to AA- from AA.

The downgrade was the result of “significant budgetary underperformance in 2009” as the public deficit ballooned to 9.3 percent of output last year, higher than Fitch’s 6.5 percent estimate.

Fitch also gave Portugal’s long-term debt a negative outlook over concerns about the potential impact of the global economic crisis on its finances.

The country’s debt reached 126 billion euros (US$168 billion) last year, 76.6 percent of GDP.

Teixeira dos Santos urged the opposition to give “unequivocal support” to the measures, which aim to reduce the public deficit from 9.3 percent of output to under the eurozone limit of 3 percent by 2013.

The program, which forecasts slight growth of 0.7 percent this year, includes a four-year freeze of government salaries, a reduction of social benefits and a delay in public investment.

The government does not need parliamentary approval to implement the measures, but the Socialist Party decided to seek a vote of support yesterday. The finance ministry said in a statement that parliament’s backing was “crucial” in order to reassure the markets.

“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 program,” the ministry said.

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