Portuguese Strike as Debt Contagion Spreads to Lisbon Streets: Euro Credit
Portuguese Prime Minister Jose Socrates is facing the country’s biggest strike in 22 years as fallout from Europe’s debt crisis spreads from bond markets to the streets.
Workers are walking off the job today to protest government austerity measures as concern about Socrates’s ability to tame the euro-region’s fourth-biggest budget deficit pushed the cost of insuring Portugal’s debt against default to a record high. Credit default swaps climbed 23 basis points yesterday to 482.2, while the yield premium demanded to hold the country’s 10-year bonds over German bunds rose 15 basis points today to 450.
The backlash against wage cuts and tax increases to trim euro-region deficits is fueling political turmoil and undermining investor confidence. Irish Prime Minister Brian Cowen said Nov. 22 he will seek early elections after a key ally abandoned his ruling coalition over his decision to seek an EU bailout. Italian Prime Minister Silvio Berlusconi faces a December confidence vote and Greek Prime Minister George Papandreou also threatened this month to hold elections.
“The strike arises in a context of a set of measures that are quite significant and have social impact,” said Carlos Firme, a director at Lisbon-based Banif Banco de Investimento SA. “It’s natural that there are demonstrations of discontent.”
The Portuguese strike follows protests in Greece, Spain and Ireland over budget cuts that may cripple their economic recoveries and deepen workers’ pain. In Ireland, labor unions are planning “mass mobilization” in protest of planned spending cuts, with a march in Dublin on Nov. 27. The International Monetary Fund forecasts Portugal’s economy may shrink 1.4 percent next year because of fiscal tightening.
Portugal’s biggest unions are reacting now because the government was slower to push through spending cuts and, as a result, made less progress in lowering the budget deficit, fueling investor speculation the country may be next to seek aid from the European Union. State workers held a strike in March.
Portugal said in September it would cut the wage bill by 5 percent for public workers earning more than 1,500 euros ($2005) a month, freeze hiring and raise value-added taxes by 2 percentage points to 23 percent to help reduce a deficit that amounted to 9.3 percent of gross domestic product last year. The measures are included in the government’s 2011 spending plan, which faces a final vote in parliament on Nov. 26.
Ireland, Spain and Greece have implemented similar measures to cut their deficit levels. Portugal’s central government budget gap widened 1.8 percent in the first 10 months. That compared with a decline of 47 percent in Spain and more than 30 percent in Greece.
Portuguese workers at ports and hospitals are participating in the strike, and Lisbon’s metro rail service is closed, the CGTP labor group said. Most flights departing from Lisbon and Oporto airports this morning have been canceled, according to the website of Portuguese airport operator ANA-Aeroportos de Portugal SA. The last general strike by the country’s largest labor organizations was in 1988.
“It’s indisputable that today we need to fight the deficit, or face the penalty of having the IMF around, but it can’t be only the workers that pay the bill,” UGT Secretary- General Joao Proenca said today in comments broadcast by television station SIC Noticias.
Slide in Polls
Support for Socrates’s minority government has slipped as discontent over the economic situation deepens. Backing for the Socialists fell 8 percentage points to 26 percent in a poll published in Diario de Noticias on Oct. 29. The Social Democrats, the biggest opposition party, led the Socialists with 40 percent, up 3 points from the previous poll in June.
Announcing the deepest deficit reductions in more than 30 years has done little to reassure investors. The yield premium on Portugal’s 10-year debt reached a euro-era record of 483 basis points on Nov. 11 as Ireland moved toward seeking a bailout.
“One of the risks that Ireland has faced and Portugal faces is that as a very small economy, even if fundamentals are better than many people give it credit for, it’s easy to be shouted down by the markets,” Kevin Daly, an economist at Goldman Sachs Group Inc., said yesterday on Bloomberg Television’s “The Pulse” with Andrea Catherwood.
Portugal’s deficit isn’t as bloated as the other so-called peripheral euro countries and the budget measures may leave it with one of the lowest shortfalls in the region next year. Unlike Spain and Ireland, Portugal also didn’t suffer a real estate bubble. The country doesn’t have a bond redemption until April and has completed this year’s bond sales, limiting the real impact of rising borrowing costs.
“Portugal is going to have a 4.6 percent deficit next year, which is lower than Germany, lower than France, lower than Spain,” Angel Gurria, secretary general of the Organization for Economic Cooperation and Development, said in a Nov. 21 interview. “Portugal has done its homework. Portugal has made its effort. They have addressed the issues and taken the bull by the horns.”
Portugal’s economic problems are “very different” than Ireland’s, and the government has made “bold decisions” to cut the deficit, European Union Economic and Monetary Commissioner Olli Rehn said Nov. 22.
Achieving that deficit reduction will become more difficult as the austerity measures bite and the recovery falters. The OECD forecast on Nov. 18 that economic growth of 1.5 percent this year will give way to a contraction of 0.2 percent in 2011 as the measures kick in. Economic growth has averaged less than 1 percent a year in the past decade.
“The problem of Portugal is growth, or more accurately the lack of it,,” Luigi Speranza, an economist at BNP Paribas SA in London, wrote in a note to investors. “Structural weaknesses and associated low potential growth are frustrating any attempt at correcting fiscal imbalances.”
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