Bonds News

UPDATE 3-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, mull strike

(Updates with Prime Minister quotes)

By Andrei Khalip

LISBON, Sept 30 (Reuters) - Portugal’s minority socialist government urged the opposition to back tough new austerity measures for 2011 and warned of catastrophe if the country failed to cut back its deficit.

Trade unions declared opposition to spending cuts and held out the possibility of a general strike. Such actions have won little support so far in a debt crisis now also hitting hard at Ireland and Spain; but the austerity measures may cut deep.

Prime Minister Jose Socrates, who relies on opposition support to get a budget approved, 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.

Speaking in parliament, he urged approval of the measures, containing spending cuts calculated to win support from the main centre-right Social Democrat (PSD) opposition.

“Not consolidating public finances would be a catastrophic option, as it would put Portugal on the path opposite to that of the European Union, leaving the Portuguese debt at the mercy fo sepculative attacks,” he said.

The PSD said it would not respond until a full budget was presented to parliament, by Oct. 15.

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


For Take a Look on European debt crisis click [nLDE68T0MG]

For graphic on European deficits


Unions 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,” said Manuel Carvalho da Silva, leader of the largest union CGTP.

The CGTP’s national council was meeting “to decide on new forms of struggle, 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 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.”


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.

Finance Minister Fernando Teixeira dos Santos said in Brussels 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”.

Economy Minister Jose Vieira da Silva believes next year’s economic growth target, of 0.5 percent, will be met as stronger exports should help offset 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 convinced the measures would have harsh consequences, with unemployment already at two-decade highs.

“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.”