Portugal Lurches into Austerity Trap

Government faces setbacks in attaining its deficit goals.

Portugal’s international creditors may soon have to ease terms of the country’s bailout to prevent the plan from derailing as the government faces setbacks in attaining its deficit goals.

Prime Minister Pedro Passos Coelho’s struggle to meet deficit pledges were further hampered last week when about 2 billion euros ($2.5 billion) of planned cuts to pensions and civil servants’ holiday pay were ruled unconstitutional. With Portugal’s 10-year bond yield above 10 percent, returning to the markets next year may be untenable, requiring more international aid despite the premier’s insistence he won’t seek concessions.

Austerity Plans

The austerity measures have deepened the recession with Portugal’s economy forecast to contract 3 percent this year and unemployment set to rise to a euro-era record 15.9 percent in 2013, according to government estimates. Economic growth has averaged less than 1 percent a year for the past decade, placing Portugal among Europe’s weakest performers.

Political Tension

The response shouldn’t be to “renegotiate everything,” Passos Coelho said in July 9 comments broadcast by SIC Noticias. “We must redouble our effort and attention to meet those goals and objectives.”

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