LISBON Portugal's government will cut spending to meet targets agreed with its lenders after a court overturned key austerity measures, Prime Minister Pedro Passos Coelho said on Sunday.
Passos Coelho said in a televised address Friday's Constitutional Court ruling posed "serious obstacles and risks" this year and next, but reaffirmed his commitment to the fiscal and economic adjustment program under an EU/IMF bailout.
"The government is committed to all the objectives of the program," he said, ruling out further tax hikes but saying it was vital to avoid a second rescue and that he had told ministers to cut spending.
The court on Friday rejected four out of nine contested austerity measures in this year's budget, including cuts to holiday bonuses for pensioners and public servants and reductions in sickness leave and unemployment benefits.
Analysts expect Portugal to be able to agree replacement measures with the European Union and International Monetary Fund to make up for the court ruling, which could cost it between 900 million and 1.3 billion euros.
The entire package of austerity measures included in the 2013 budget is worth about 5 billion euros. The largest tax hikes in living memory were mostly upheld by the court.
The court's decision came before an informal meeting of euro zone finance ministers this week in Dublin expected to approve extensions of rescue loan maturities for Portugal and Ireland.
Passos Coelho acknowledged that the ruling weakened Portugal's stance at the meeting, but said he told Finance Minister Vitor Gaspar to do all he could to protect the country's interests there and achieve an extension.
The government says the extension is essential for Lisbon's successful exit from the bailout program in 2014.
Lisbon has to cut the budget deficit to 5.5 percent of gross domestic product this year from 6.4 percent in 2012, when it missed the goal but was still lauded by lenders for its efforts. The lenders have eased Portugal's deficit goals twice since the rescue was agreed, recognizing consolidation efforts.
Portugal returned to the bond market for the first time since its 2011 bailout in January, selling debt due in 2017, and has been preparing a longer-maturity bond issue. Analysts say the court ruling may now delay the new issue.
(Reporting by Andrei Khalip and Sergio Goncalves; Editing by Jason Webb)