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November 25, 2010

Portugal Approves Austerity Budget

Portugal has become the latest European nation to trim social welfare spending and raise taxes in an effort to control its burgeoning national debt.

Portugal's minority socialist government on Friday approved a 2011 budget that will cut public spending, including the wages of government workers.  It also will increase the country's value-added tax by two percentage points, to a maximum of 23 percent.

The Portuguese parliament's action came amid new international financial worries that the sovereign debt crises that started in Greece and Ireland could spread.  The next debt problem could afflict Spain, which accounts for nearly 12 percent of the economic production of the 16 nations that use the euro as their common currency. Spain's economy is about double that of Greece, Ireland and Portugal combined.

But Spanish Prime Minister Jose Luis Rodriguez Zapatero told a radio interviewer that he could "absolutely" rule out a financial bailout for Spain like those in Greece or Ireland.

The Portuguese government is hoping that with approval of the austerity measures it will not have to seek a bailout from its European partners and the International Monetary Fund. The budget aims to cut the country's deficit from 7.3 percent of its overall economic production this year to 4.6 percent next year.

Lisbon has repeatedly said it does not want or need international financial assistance.  However, some international financial analysts have suggested that Portugal should accept loans earlier rather than later, to stem fears that it could be the next country to be forced to accept a bailout.  Ireland also denied it needed financial help until it relented last Sunday and asked for assistance.

With their debts, Portugal and Spain have both been forced to pay higher interest rates to attract investors to buy bonds to finance their operations.  The interest rate on Portuguese bonds increased to 7.1 percent Friday, more than four percentage points higher than the interest paid on bonds sold by Germany, one of the strongest European Union economies. Spain's notes are 2.7 percentage points higher than Germany's.

Portugal's largest opposition party, the Social Democrats, abstained from voting when the austerity measures were approved Friday, as it had earlier agreed to do.

Meanwhile, Irish financial negotiators continued their talks with EU and IMF officials in an effort to conclude details of the Irish government's $115 billion bailout ahead of Monday's reopening of world financial markets.

 

Some information for this report was provided by AP and AFP.