Portugal minister says court decision upsets bailout exit

LISBON, June 2 Mon Jun 2, 2014 5:15pm EDT

LISBON, June 2 (Reuters) - The rejection of a series of austerity measures by Portugal's supreme court will have a "significant" budget impact which will be felt beyond 2014, and could affect the formal end of the country's bailout, the finance minister said on Monday.

Portugal's supreme court struck down on Friday several austerity measures in the government's 2014 budget, including salary cuts in the public sector, creating a fiscal gap of about 700 million euros this year.

The measures were part of the long list of austerity plans included under Portugal's 78-billion-euro bailout, which ended last month. But Finance Minister Maria Luis Albuquerque said on Monday that the letter of intent sent to the creditors at the end of the bailout will now have to be changed.

"The (bailout) programme wasn't yet formally concluded and, at this moment, we are not in a condition to know when that will happen," she told journalists.

She said the letter of intent to the bailout creditors - the European Union and IMF - had been written and sent.

"The decisions by the supreme court have a very significant impact and they are not limited to 2014," she said.

"They also have an impact on the commitments assumed in the budget strategy document which represents the commitments by the country after the bailout," she said, referring to the country's medium-term budget plans.

Even without the bailout, Portugal needs to gradually cut its budget deficit in coming years under European Union agreements. The budget deficit must be cut to 4 percent of gross domestic product this year and to 2.5 percent in 2015 from 4.9 percent in 2013.

Analysts have said the most likely alternative to the measures will be to raise taxes further, even though that could hit the country's nascent economic recovery. During the austerity of the bailout and its debt crisis, Portugal descended into its worst economic downturn since the 1970s.

"We will need time to think over how to respond to this situation," the minister said. "At this time, we are not in a position to respond to the question of when we will be ready with (alternative) measures."

The minister said the government is also awaiting further decisions by the supreme court which could have a greater impact on this year's budget.

The court ruled against planned salary cuts of between 2 and 12 percent in the public sector, undermining one of the key elements of spending cuts set out in the international bailout.

The court also ruled out cuts in pensions, and sickness and unemployment benefits. It said the measures contravened the rights of citizens spelled out in the constitution.

Pending decisions before the court include extra contributions on pensions by civil servants and the reduction of discounts given to civil servants on health insurance plans. (Reporting by Sergio Goncalves; Writing by Axel Bugge; Editing by Eric Walsh)

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