Bailout secured, but no drastic cuts – Portuguese PM
4 May, 2011 14:06
Following a wave of anti-austerity protests, Portugal has announced that it has secured a $115 billion bailout package from the EU. The exact terms of the deal are yet to be finalized, but Portugal's PM stated no drastic spending cuts were required.
Portuguese caretaker Prime Minister Jose Socrates said Portugal has reached the favorable agreement after more than two weeks of negotiations with the International Monetary Fund, the European Central Bank and the European Commission. The 78-billion-euro (or $115 billion) bailout will be transferred to Portugal over a three-year period, while the repayment period has been settled at ten years, ITAR-TASS news agency reports. Portugal hopes to receive the first tranche by June 15 when the country has to pay older credit obligations."The government has secured a good agreement. This is an agreement which defends Portugal," Socrates said in a televised address to the nation on Sunday. Socrates promised his crisis devastated nation that salaries and the lower pensions will not be affected. He specified that pensioners who receive 600-1500 euros per month will not receive cuts.After Greece and Ireland, Portugal will be the third Eurozone member to require a financial lifeline to keep its economy afloat. The country has been driven by the interim government since March 2011, so the EU, IMF and ECB are seeking the approval of the bailout program from all major Portuguese political parties to ensure the country will not go back on the deal after the June vote. When the bail-out deal is signed, it will then have to be approved by donor EU nations, some of which face tough internal opposition.Rui Tavares, a Member of the European Parliament, is sceptical the bail-out will work for Portugal, as the packages prepared by the EU and the IMF for Ireland have not succeeded. This package will come on top of other austerity measures taken this year by the country, points out Tavares, and this will finally hit the pockets of ordinary Portuguese families, while the internal market will continue contracting. “We have had a major debt problem in the private sector, even more than in the public sector. The public sector at some time even intervened to bail out banks,” says Tavares. “The problem is the structural weakness of Eurozone architecture. This is the original sin which has not been addressed by any of these bail-out measures. We have to address the EU and Eurozone right away and ask them ‘What do you want to be? Do you want to federalize your economic governance and become a union transfer, where richer member states sometimes transfer what they gain by being in the euro to the debts that have been created by weaker economies? Or do you want to keep on fragmenting and one day split the euro?’ If the IMF does not negotiate with these two variables in mind, it is futile to negotiate as such,” concludes Tavares.Professor Harald Hau, from the finance department at the INSEAD Business School, thinks that the bail-out will only gain Lisbon some time to implement more fiscal reforms in the medium-term rather than solve any problems. “The level of debt in Portugal is 87-90 percent [of GDP]. That has historically been associated with frequent defaults. We cannot claim that the situation is as desperate in terms of an absolute need for restructuring [credit obligations] in the medium-run as, for example, in Greece, but default is not excluded,” says Hau.Hau believes that the main problem in Portugal is the one of fiscal accountability: whether the Portuguese political system can constrain government spending, undertake structural reforms, and whether in the long-run the Portuguese economy can regain competitiveness.