Eurozone crisis: After Cyprus, troubles hit Portugal

Just weeks after European leaders tamped down a banking crisis in Cyprus, troubles in the eurozone have reared their head, this time in Portugal.

In an address to his beleaguered nation, Prime Minister Pedro Passos Coelho warned that his government would be forced to cut spending more and that lives “will become more difficult” after a court on Friday struck down some of the austerity measures put in place after a bailout package two years ago.

The renewed tension in Portugal raised the spectre of further trouble elsewhere in the eurozone, where ailing members have struggled to rebuild economic growth after enduring wrenching spending cuts.

“The risks in the eurozone have increased markedly over the past six weeks or so,” wrote Nicholas Spiro of Spiro Sovereign Strategy, a Londonbased consultancy. A critical moment for the latest trouble took place when Portugal’s constitutional court struck down four of nine contested austerity measures that the government had introduced last year as part of a 2013 budget that included about 5 billion of tax increases and spending cuts.

The ruling left the government short of about 1.4 billion of expected revenue, or more than one-fifth of the 2013 austerity package. Specifically, the court ruled as unconstitutional and discriminatory the government’s plans to cut holiday bonuses for civil servants and pensioners, as well as to reduce sick leave and unemployment benefits.

Since Greece’s bailout in 2010, increases in the borrowing costs of troubled euro countries have spread from one country to another as investors have tried to anticipate possible problems elsewhere in the currency union. With that contagion risk in mind, politicians in Spain wasted no time over the weekend trying to distance their country from the latest turmoil in Lisbon.

Esteban Gonzalez Pons, a senior party official, told a gathering of his governing Popular Party that “Spain is not in the situation of Portugal. If Portugal is in worse shape than Spain, it is because they have not taken the necessary measures that we have taken in our country”. In May 2011, Portugal became the third eurozone country, after Greece and Ireland, to negotiate an international bailout.

Lisbon received 78 billion from the International Monetary Fund and European creditors in return for introducing spending cuts and tax increases. Since then, however, Portugal has failed to meet its promised goals. Its economy has instead continued to sink into one of Europe’s most severe and prolonged recessions, inspiring labour strikes and huge street demonstrations.

But Passos Coelho defended the track record of his nearly 2-year-old government and pledged to do “everything to avoid a second bailout”. While the ruling is a blow for the government, it also gives Passos Coelho new arguments to persuade international lenders to grant Lisbon additional leeway in meeting its budgetary targets.

Πηγή: New York Times