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Portugal Gets Extra Year to Meet Budget Targets

As Portugal’s economy fails to recover, the government struggles to reduce its deficit.

Portugal’s international creditors gave the Southern European country an extra year to meet its budget targets on Friday, allowing the country to exit its bailout program in 2014 without making deeper spending cuts.

After a meeting with inspectors from the European Central Bank, the European Commission and the International Monetary Fund that Portuguese finance minister Vitor Gaspar described as “difficult,” the “troika” cleared the way for another €2 billion in financial aid.

The three entities committed €78 billion in financial support to Portugal in early 2011 when it could no longer borrow affordably from financial markets. It was the third European country after Greece and Ireland to request a bailout.

Portugal’s national debt had grown some €40 billion in the preceding three years to exceed its annual economic output.

In 2009, when the financial crisis hit Europe and Portugal’s debt stood at 70 percent of gross domestic product, the government posted a deficit of more than €17 billion or 10 percent of GDP. Its economy contracted almost 3 percent that year.

In 2010, the deficit was €16 billion; the economy shrank 1.4 percent. In 2011, the government reduced the shortfall to €7 billion but the economy still shrank 1.6 percent.

Last year, after Prime Minister Pedro Passos Coelho’s liberal conservative party had taken over the government from the Socialist Party, the economy contacted another 3.2 percent. 2.3 percent negative growth is expected for 2013.

Gaspar, who insisted in an interview with The New York Times last year that the previous left-wing government’s attempt to stimulate growth with deficit spending was to blame for the nation’s debt crisis, said on Friday that lingering doubts about the eurozone’s ability to recover were undermining his government’s efforts. “We all know how this external setting affects the Portuguese economy,” he said.

But fiscal consolidation measures, including tax increases and a 20 percent pay cut for civil servants, have also affected growth as they depressed business’ ability to invest as well as consumer spending.

Unemployment, which hit a record 16.9 percent last year, is expected to climb to 18.2 percent this year and not expected to fall until after 2014.

Despite mass protests and strikes, Portugal has not seen the sort of social unrest that plagues Greece and neighboring Spain. The ruling party did see its popularity fall to 33 percent late last year compared to almost 39 percent in the last election. Support for the opposition Socialists rose to 35 percent. They got 28 percent of the votes in 2011. The next municipal elections are scheduled for October.