Portugal Requests European Financial Support
Faced with mounting borrowing costs, the Portuguese request a bailout from their fellow European Union member states.
Portugal on Wednesday finally requested financial support from its fellow European Union member states. The troubled Iberian economy has struggled to finance its debt for months.
While the European Commission and eurozone leaders expected that bailing out the country could cost some €75 billion, at least one minister from the single currency bloc told The Wall Street Journal that the joint EU and International Monetary Fund rescue operation could amount to up to €90 billion.
It is unclear whether Portugal’s socialist caretaker government, which tendered its resignation earlier this month after parliament failed to approve its proposed austerity measures, has the legal authority to implement the sort of spending cuts that would be a condition of international financial support.
The bailout would likely be paid out in phases before and after the country’s June 5 elections.
The details of the rescue effort were set to be negotiated when European finance ministers met in Hungary on Friday.
Portugal is the third eurozone country after Greece and Ireland to turn to Europe for help. Since Greece teetered on the brink of sovereign default last year, European leaders designed a financial rescue fund to guarantee the borrowing of highly indebted nations. Ireland was granted some €67.5 billion in support four months ago but had to implement deep budget cuts in return.
The Portuguese government introduced its first round of austerity measures in September of last year, aiming to cut its deficit of 7 percent of GDP in half. The country’s national debt equals more than 80 percent of national income. Both figures far exceed the norms set by the eurozone’s Stability and Growth Pact.
With unemployment hovering near 10 percent and almost 20 percent of Portuguese officially living below the poverty line, the South European country is in dire need of reform.
Its highly inefficient public sector, accounting for nearly half of GDP, has undermined overall competitiveness but neither of the main political factions has demonstrated a willingness to seriously cut spending.
Portugal’s labor laws are inflexible. Regulations on dismissals and the use of temporary contracts are burdensome and expensive while dismissing an employee can be difficult. The government maintains majority ownership of air- and seaports, railways and sanitation. Tax evasion is a problem and while corruption is limited, it is more widespread than in most of the rest of Europe.
The Socialist Party has governed in Portugal since 2005 although Prime Minister José Sócrates lost his parliamentary majority in 2009. His administration has enacted public-sector pay cuts and pension reforms while boosting revenue by taxing capital gains.
The liberal and conservative opposition parties are expected to fare well in new elections but they were the ones to oppose cuts in social security spending and unemployment benefits in March.