Portugal’s Coelho Will Seek New Measures, Yield to Court Ruling

Portuguese Prime Minister Pedro Passos Coelho
Portuguese Prime Minister Pedro Passos Coelho arrives at an EU summit in Brussels on Dec. 19, 2013. Photographer: Alain Jocard/AFP via Getty Images

Portuguese Prime Minister Pedro Passos Coelho said he will seek alternative ways to meet deficit targets after the country’s Constitutional Court yesterday blocked his plan to reduce state workers’ pensions.

“As the court admits that a measure aiming to ensure the sustainability of pensions and involving a reduction of pensions being paid may be constitutional in certain conditions, we will analyze those conditions to see in what way we can find a substitute measure,” Coelho told reporters in Brussels today.

The court blocked measures that would lead to a 10 percent reduction in pensions paid to state workers and generate estimated savings of 728 million euros ($993 million) next year, according to the 2014 budget. President Anibal Cavaco Silva asked the court on Nov. 23 to review the government’s plan, which aimed to make social protection for state workers converge with the social-security regime of the private sector.

While Portugal emerged from its longest recession in at least 25 years in the second quarter, Coelho still has to trim spending by 3.2 billion euros next year to meet targets in the country’s European Union-led aid plan after relying mostly on tax increases this year. The prime minister is trying to regain full access to debt markets with the end of a 78 billion-euro bailout approaching in June.

“We will analyze the ruling very, very carefully,” Coelho said. “We know we have to reconcile two things: the effectiveness of any measure that might be adopted so that the execution of the budget next year is not at risk, and at the same time the confidence of investors in order to complete the financial aid program.”

Finding Alternatives

The court said last night in a statement that it wasn’t convinced that public-sector workers are treated better than private-sector counterparts in terms of pensions. It also said any “fair” pension cuts would have to be “gradual.”

Constitutional Court judges have now blocked government measures four times this year, including pay cuts for state workers. The 2014 budget includes 1.3 billion euros of reductions to personnel costs.

“I’m sure that Portugal will deal with it responsibly,” German Chancellor Angela Merkel told reporters in Brussels last night. “It’s not an easy situation but I think Portugal will find a way to solve it.”

Court Reviews

After the budget plan comes into force in January, members of parliament as well as the president can refer parts to be reviewed by the 13-member court, the country’s highest judicial body.

The government targets a budget deficit of 5.5 percent of GDP for this year and 4 percent for 2014. It forecasts the shortfall will fall below the EU’s 3 percent limit in 2015. Debt is forecast to peak at 127.8 percent of GDP this year.

Portugal plans to sell bonds early next year as investors from Scandinavia and the euro area return to its market, Joao Moreira Rato, head of the nation’s debt agency, said in a Dec. 6 interview. The sale will probably be arranged via banks and will help address next year’s funding needs of about 7 billion euros, he said.

The country’s two-year note yield fell less than one basis point to 3.13 percent at 1:35 p.m. in London. The 10-year yield was unchanged at 6.03 percent, still higher than in May, when the rate reached the lowest since 2010 and Portugal last sold bonds.

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