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UPDATE 2-Portugal edges closer to budget deal under EU pressure
September 30, 2010 / 11:34 AM / 7 years ago

UPDATE 2-Portugal edges closer to budget deal under EU pressure

* New measures weighted to spending cuts

* Centre-right opposition seen likely to approve

* Trade unions declare opposition, meet on strategy

(Updates with union, Finance Minister)

By Andrei Khalip

LISBON, Sept 30 (Reuters) - Portugal’s minority Socialist government edged closer to agreement with the opposition over the 2011 budget on Thursday after announcing new austerity measures, winning support from the European Union.

Trade unions declared opposition to spending cuts and met to decide their response, holding out the possibility of a general strike. Strikes, however, have won little support so far in an economic crisis now also hitting hard at Ireland and neighbouring Spain.

“What we should be asking ourselves is what would happen if these measures were not taken,” said Antonio Mexia, CEO of Portugal’s largest company and utility Energias de Portugal. “Basically, the government is doing what has to be done.”

Prime Minister Jose Socrates announced late on Wednesday cuts of 5 percent in civil servant wages and increases in taxes, hoping to save 5.1 billion euros ($6.93 billion) next year.

The measures helped soothe investor nerves on Thursday, with Portuguese bond spreads versus German bunds falling after hitting euro lifetime highs earlier in the week on growing worries over the budget deficit. The spread fell 10 basis points to 422 basis points early Thursday.

The the centre-right Social Democrat (PSD) opposition said it would not take a stance until it had seen the budget bill.

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Unions have warned they could step up industrial action in response to more cutbacks they say will hurt workers.

“This way the country sinks to the bottom,” Carvalho da Silva, leader of the largest umbrella union CGTP, told Antena1 radio. He said the government had not consulted the unions on wage cuts as the law demands.

The CGTP’s national council was in a meeting on Thursday “to decide on new forms to fight, a general strike being a possibility,” said a CGTP spokeswoman. The decision would be announced on Friday.

The European Union, which had been pressing Lisbon to act, welcomed the measures.

“Together with the Commission and the ECB, the Eurogroup welcomes the ambitious additional consolidation measures adopted by the Portuguese government yesterday which cover both 2011 and 2010,” Eurogroup chairman Jean-Claude Juncker said in Brussels.

Concerns over Portugal’s budget came into sharp focus this week after the main opposition PSD said it would not commit to backing the 2011 budget in parliament, urging the government to focus on cutting spending before raising taxes.

The new measures may have addressed those concerns. Two thirds of the savings will come from spending cuts.

“It looks like the PSD is open to negotiate and will have to make concessions,” said Andre Freire of Lisbon’s Social Sciences Research Institute. “I don’t think the government will have major problems in getting the budget approved as the bulk of the deficit cut is on the spending side.”

Finance Minister Fernando Teixeira dos Santos said in Brussels he expected the opposition parties “to stand up to their responsibilities” and approve the budget.

TROUBLED NEIGHBOURS

Neighbouring Spain, which weathered a general strike on Wednesday, had its triple-A credit rating cut to Aa1 by Moody’s Investor Service.

But Ireland became the chief focus of Eurozone debt worries after announcing it might have to pump some 34 billion euros ($46 billion) into Anglo Irish Bank.

The Portuguese government has promised to cut this year’s budget deficit to 7.3 percent of gross domestic product from 9.3 percent last year and further reduce it to 4.6 percent in 2011.

Teixeira dos Santos said economic growth this year was likely to exceed the government’s forecast of 0.7 percent, and “will be very likely above one percentage point”.

Earlier, Economy Minister Jose Vieira da Silva said he believed next year’s economic growth target, of 0.5 percent, would be met despite the impact of the measures.

Diego Iscaro, an economist at IHS Global Insight in London, said the measures showed the government was serious about deficit cuts. “(But) my only worry is what impact this will have on growth. If you break the balance between fiscal tightening and growth, austerity can become counterproductive.”

Portuguese appeared increasingly convinced the measures would have harsh consequences.

“This austerity is a political decision but there are alternatives,” said student Duarte Alves. “I don’t know if I’ll be able to get a job when I finish university and that scares me, but I think a political change could create some hope.”

Additional reporting by Shrikesh Laxmidas, Sergio Goncalves, and Daniel Alvarenga, writing by Axel Bugge; editing by Ralph Boulton

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