| LISBON, Sept 12
LISBON, Sept 12 Portugal's leaders have
generally done what their international lenders have advised,
setting a pattern of government compliance and official praise.
This week's bailout inspection could be different.
For the first time since Portugal received its bailout in
2011, European Union and International Monetary Fund officials
arriving on Monday will have to deal with new Deputy Prime
Minister Paulo Portas, who nearly brought down the government in
July by challenging the pain of austerity measures.
Portas threatened to take his small, populist centre-right
party out of government, which would have robbed it of its
majority. The standoff won him promotion to deputy prime
minister overseeing negotiations on the bailout.
He has already said last week that he wants an easing of the
budget deficit goal for 2014, drawing a bold line between his
stance and that of former Finance Minister Vitor Gaspar, who
never swerved in his determination to stand by budget targets.
"It's no secret that the government and troika (of lenders)
had different positions during the (previous) bailout review
about the deficit," Portas said.
Gaspar resigned in July, citing lack of support for measures
under the bailout.
"I don't think there is any doubt that this will be the
hardest review since the programme started," said Filipe Garcia,
head of Informacao de Mercados Financeiros consultants in Porto.
Reflecting that, bond yields have jumped higher in the past
few weeks to above the 7 percent level where investors see
dangers in 10-year debt, a trend that will not be helped by the
U.S. Federal Reserve preparing to run down the bond-buying that
had helped to pacify global markets.
Portugal descended into its deepest downturn since the 1970s
when its debt crisis started three years ago and unemployment is
near record highs after relentless spending cuts and the largest
tax hikes in living memory.
While the Portuguese have grown increasingly angry at the
austerity they have had to endure for three years, protests have
been considerably less strident than in countries like Greece.
Many Portuguese are hopeful that the economic growth
recorded in the second quarter - the first in two-and-a-half
years - is the beginning of recovery. But further spending cuts
could snuff out the prospect of a stronger economy improving the
"While Portugal has been able to avoid snap elections, the
political limits of austerity have been reached and there is
significant pressure to go for growth," said Nicholas Spiro,
managing director at Spiro Sovereign Strategy.
"The troika has already shown flexibility towards Portugal
and does not want a Greek-style situation on its hands whereby
it keeps cutting more slack with scant prospect of Portugal
being able to stand on its own two feet."
The political noise surrounding the review may be especially
loud as Portugal holds local elections on Sept. 29. The
opposition Socialists lead in opinion polls.
Apart from the growing weariness about austerity among
Portugal's 10 million people, the Constitutional Court has
consecutively thrown out several measures over the past year,
including last month's rejection of a bill that would have
effectively allowed the state to fire public sector workers.
The court could still shoot down other measures, such as
lower pensions and more working hours in the public sector.
RESISTANCE TO EASE GOALS
Portas and Finance Minister Maria Luis Albuquerque travelled
to Frankfurt, Brussels and Washington earlier this month to talk
to officials from the 'troika' - the European Commission,
European Central Bank and IMF. That suggests talks on the next
review have already started.
But the signals from the 'troika' suggest Lisbon may
struggle to get any easing of austerity. Under the bailout
agreement it is supposed to slash around 4 billion euros ($5.3
billion) in spending next year.
The head of euro zone finance ministers, Jeroen
Dijsselbloem, said on Friday Portugal should stick to deficit
reduction goals already agreed. "I don't think it's a good
signal to keep the discussion alive whether the targets should
be more or less," he said..
Lisbon's challenges are large, if it wants to exit the aid
programme as planned in the middle of next year. A less
stringent, precautionary lifeline to replace the current bailout
programme could be discussed this month.
"It seems to me that a precautionary credit line is on the
cards," said Garcia. "I expect them to touch on that issue."