Following a two week visit to Lisbon the troika of inspectors from the European Central Bank, the International Monetary Fund and the European Commission have revised Portugal’s deficit targets.
Under the previous €78 billion bailout conditions the deficit targets were set at 4.5 per cent of Gross Domestic Product for 2012 and 3 per cent of GDP for 2013. However, after assessing the struggling nation’s progress the troika have alleviated some of the pressure on these goals by revising them to 5 per cent for this year and 4.5 per cent for the year after. They have also sanctioned a year extension, setting a target of 2.5 per cent for 2014.
Although it’s been predicted that the Portuguese economy will shrink further in 2013 the troika asserted that the nation’s bailout is ‘broadly on track’. The trio of inspectors also stated: ‘Overall, this review confirms that the program is making progress, albeit against strong headwinds. Provided the authorities persevere with strict program implementation, euro area member states have declared they stand ready to support Portugal until full market access is regained.’ The troika also noted that the country’s debt ‘remains sustainable and will be on a firm downward trajectory after 2014’ further adding that ‘policy choices need to strike a balance between advancing the required fiscal adjustment and avoiding undue strains on the economy.’
It was intimated that the acceptance of this decision will allow the next bailout instalment of 4.3 billion euro’s to be distributed, possibly as early as October.
The country has implemented ruthless austerity measures in its fervour to meet its goals. So far widespread spending cuts and tax hikes have sent unemployment jumping to record levels and pushed the economy into the deepest recession experienced for forty years. Despite this, the Portuguese government has so far avoided the type of public backlash seen in other members of the euro-zone but there are mounting fears that this uneasy peace will not last if the situation continues to deteriorate.
Last Friday the nation’s government revealed that the social security taxes paid by workers in 2013 will be sharply increased and yesterday more tax rises were announced. As a consequence, some are predicting that the troika’s decision could cause unrest. Political analyst with the University of Lisbon Virato Soromenho Marques argued that ‘People have to know what they are making sacrifices for, and this easing of the targets sort of takes the sense out of their sacrifices. Also, the programme is extended by another year and nobody will bear another year like this.’
In response to the troika’s decision Portugal’s Finance Minister Vitor Gaspar released a statement in which he attributed much of the nation’s present difficulties to the continuing euro-zone crisis. The uncertainty in Spain has been particularly worrying for Portugal as the majority of its exports go to its larger neighbour. Speaking to reporters Gaspar said; ‘We are living through some of the most difficult times of our democracy. We want to guarantee that we can overcome our national emergency but also be capable of preventing successive periods of financial instability, economic recession and social deterioration.’ Gaspar went on to add that the revised deficit targets would not prevent Portugal from returning to the bond markets in a year from now as originally planned, nor did the troika’s revisions ‘imply any change to the programme’s financial package.’
Undoubtedly, Portugal will also be hoping to benefit from the gradually strengthening confidence in financial markets which followed last week’s ECB’s announcement.
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