April 08 - Portuguese will suffer from cuts to schools and hospitals to protect civil service benefits after the constitutional court rejected austerity measures that would have reduced holiday bonuses and other public sector perks. Ciara Sutton reports.
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Exactly two years after seeking a 78 billion euro international bailout, Portugal is back in the spotlight.
Prime Minister Pedro Passos Coelho promised back then that two years of tough measures would lead to growth - instead the country is facing a long and deep recession.
The government was one of Europe's staunchest advocates of austerity.
But it's hit a major stumbling block.
The constitutional court has blocked four out of nine austerity measures from this year's budget - depriving the state of around 900 million euros.
Bank of New York Mellon's Simon Derrick.
(SOUNDBITE) (English) BANK OF NEW YORK MELLON'S, SIMON DERRICK, SAYING:
"He has to push on whatever austerity measures he can do and whatever spending cuts he can make. Because clearly the appetite from northern Europe to provide any more support is gonna go steadily lower. Cyprus has clearly weakened support in northern Europe for giving further aid to southern Europe or easing terms in southern Europe. I think he's in an extremely difficult position. How he works this out I don't know."
Portugal's austerity package is worth about 5 billion euros and includes the largest tax hikes in living memory.
To avoid a second bailout it must now find new measures to replace those rejected by the court.
That could mean cuts to health and education while reinstating public sector perks
The European Commission has already given Portugal more time to pay and says it must solve this crisis on its own.
But US Treasury Secretary Jack Lew - on his first official visit to the region - says austerity should be relaxed to promote growth.
(SOUNDBITE) (English) US SECRETARY OF TREASURY, JACK LEW, SAYING:
"In the United States, our economic recovery is gathering strength, American consumers and businesses have demonstrated their resilience with consumption and investment continuing to grow as government support for the economy has receded. The US economy has expanded for 14 consecutive quarters and although the pace of job creation is not as fast as we would like, the private sector has added jobs for 37 straight months. As we address our long term challenges however, our economy's strength remains sensitive to events beyond our shores and we have an immense stake in Europe's health and stability."
Euro zone sentiment fell for a second consecutive month in April
Cyprus is being blamed after it forced heavy losses on wealthy depositors to secure a 10 billion euro bailout from the EU and IMF.
But Portugal's plight also highlights how old problems as well as new ones can still be a cause for concern.
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