EU Says Portugal Court Rulings May Complicate Return to Market

The European Commission said new rulings by Portugal’s Constitutional Court blocking government measures may make it tougher for the country to regain full access to the bond market.

“Risks from further negative rulings by the Constitutional Court cannot be discarded and could make the government’s plans to fully access the debt market from mid-2014 on significantly more challenging,” the Brussels-based commission said today in a report on the eighth and ninth reviews of the aid program for Portugal.

While the economy may pick up next year, Prime Minister Pedro Passos Coelho still has to trim spending by about 3.2 billion euros ($4.3 billion) in 2014 after relying mainly on tax increases this year to meet targets set in the rescue program from the euro area and the International Monetary Fund. Portugal is trying to regain full access to debt markets, with the end of its 78 billion-euro rescue plan approaching in June.

The 2014 budget is due to be approved in parliament on Nov. 26 and includes 1.3 billion euros of cuts to personnel costs. Constitutional Court judges already blocked austerity measures, including pay cuts for state workers, on three occasions this year.

“In the event that some of the measures were to be found unconstitutional, the government would need to reformulate the draft budget in order to meet the agreed deficit target,” the EU said. “In view of the rapidly shrinking room of manoeuvre in identifying appropriate consolidation measures, this would imply increasing risks to growth and employment and reduce the prospects for a sustained return to financial markets.”

Financing Needs

The government targets a budget deficit of 5.5 percent of gross domestic product for this year and 4 percent for 2014. It forecasts the shortfall will fall below the EU’s 3 percent limit in 2015, when it aims for a 2.5 percent gap. Portugal’s debt is forecast to peak at 127.8 percent of GDP this year.

The IMF on Nov. 13 said that Portugal’s ability to regain full market access after its aid plan ends is limited and support from European partners will remain important to assure medium-term financing needs.

The country’s net financing needs in 2014 will be 11.7 billion euros, Secretary of State for Treasury Isabel Castelo Branco said on Oct. 15. The government plans gross bond issuance of 10.5 billion euros next year, when financing from the euro area and IMF will be 7.9 billion euros, she said.

The commission said today there are “early signs of a recovery in economic activity” in Portugal. The economy expanded for a second quarter in the three months through September. The government on Oct. 3 raised its 2014 growth forecast to 0.8 percent and expects the economy will shrink 1.8 percent this year.

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