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Portugal promises to stay course on austerity after court setback
December 20, 2013 / 4:21 PM / 4 years ago

Portugal promises to stay course on austerity after court setback

LISBON (Reuters) - Portugal's government pledged on Friday to find alternative fiscal measures to reduce its budget deficit after the country's constitutional court delivered another blow to plans to cut state spending and smoothly exit a bailout next year.

Late on Thursday the court rejected a measure to cut public sector pensions, in the latest of a series of rulings it has delivered overturning austerity measures agreed by the government with Portugal's creditors.

Markets paid little attention to the decision, which prevents the government from saving about 380 million euros, suggesting investors believe the government will still stay the course on austerity to ensure Portugal exits its bailout.

"In spite of this news causing some worry among investors, I believe it was already incorporated by the markets, and thereby there was no real negative reaction," said Albino Oliveira, an analyst at brokerage Fincor.

Yields on Portuguese 10-year bonds were largely unchanged from a day earlier at 6.07 percent.

The government has insisted that it is not considering any kind of 'plan B' to offset potential challenges by the court.

But Prime Minister Pedro Passos Coelho promised on Friday that the government would find alternatives to ensure the country cuts the budget deficit as planned to 4 percent of gross domestic product next year from 5.5 percent.

"The government will now study the new situation, on the basis of a close reading of this decision, to present a new measure to allow us to meet our stated goals," Passos Coelho told reporters in Brussels.

"It is our profound conviction ... that external financing and the sustainability of public spending will only be assured with measures like this."

Eurogroup head Jeroen Djisselbloem welcomed the government's commitment to find alternative measures quickly.

"The reform effort must be sustained," he said in a statement. "An ambitious and credible fiscal consolidation strategy as well as the rigorous implementation of structural reforms will be crucial to ensure investors' confidence in the government's policies, with a view to a successful conclusion of the adjustment program."

Filipe Garcia, head of Informacao Mercados Financeiros consultants, said the court decision was expected and the lack of market reaction reflected the growing belief among investors that the government will adopt alternative measures if need be.

"I don't think neither this rejection nor a slightly higher budget deficit is going to change the game," Garcia said

The government's hope is that gradually improving economic news - Portugal's economy grew in the second quarter after nearly three years of recession - will allow it to exit the bailout next year.

The court could still reject several other austerity measures, including proposed salary cuts for public sector workers, which amount to more than 1 billion euros.

Garcia said that means the country will probably have to rely on some kind of precautionary loan from creditors after the bailout expires, in contrast to Ireland's 'clean' exit from its lending program this month.

"We will have to continue to be compliant (with the bailout conditions)," he said.

Editing by Jeremy Gaint

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