Portugal court ruling could hamper deficit plans: Moody's

LISBON Thu Jun 12, 2014 11:53am EDT

LISBON (Reuters) - The rejection by Portugal's constitutional court of a series of austerity measures will make it more difficult for the country to balance its budget by 2018 as planned, credit rating agency Moody's said on Thursday.

It could also delay any further potential upgrade to Portugal's sovereign bond rating, which Moody's lifted one notch to Ba2 on May 9. It said then that a further rise could come within months.

"The court's decisions raise question marks over whether the planned fiscal consolidation path - achieving a balanced budget by 2018 - can be achieved if important spending categories cannot be reduced," Moody's said in a statement.

Portugal's highest court struck down last month several budget measures, including some public sector salary cuts, creating a fiscal gap of about 700 million euros this year.

That has raised questions about the government's ability to cut the budget deficit as agreed with the European Union and could delay the final 2.6 billion euro payment under Portugal's EU/IMF bailout deal, which formally ended in May.

The rejected measures had been agreed with creditors before the bailout ended and the government must now find other ways to cover the budget shortfall.

Moody's said any further upgrade to Portugal's rating was now "pending the government's response to the court's ruling and our assessment of the country's medium-term fiscal prospects".

The rating agency said this year's budget deficit goal of 4 percent of GDP is still achievable but that the court's decision could hamper deficit reduction in the longer-term because it limits the scope for cost-cutting in the public sector.

"Given the high level of expenditure and the steep tax increases already implemented in the past few years, we believe that it will be difficult to materially and consistently reduce the budget deficit in the coming years if the government is unable to address its key spending areas," it said.

Portuguese government spending is equal to about 49 percent of gross domestic product.

(Reporting by Axel Bugge; Editing by Catherine Evans)