September 17, 2012 / 2:37 PM / 5 years ago

Political dangers stalk Portugal bailout effort

LISBON, Sept 17 (Reuters) - A new bolt of austerity has shattered Portugal’s confidence it can avoid the political instability and social unrest that are blighting fellow bailout recipient Greece.

A government plan to raise social security contributions has united unions, employers and opposition in demanding a rethink. The social cohesion that has so far helped Portugal more or less stick to the terms of its 78-billion-euro bailout is damaged and could blow the centre-right government off course.

Nationwide protests on Saturday drew 500,000 people according to the organizers, showing the scale of anger from across the political spectrum at the measures. The Portuguese already faced tax hikes and spending cuts that have pushed unemployment to record highs.

On Monday, strikes over salaries and labour reforms brought most of the country’s ports to a halt and reduced operations at refineries.

The protests were particularly worrying for the Social Democrat government because they showed that many of its supporters have lost faith in austerity that has pushed the country to its deepest recession since the 1970s.

“This is the first time I came to protest, I voted for the government and I regret it,” said Carlos Figueiredo, 30, a researcher in the northern city of Viseu. “It’s perfectly fine to fix the public accounts but these measures don’t make sense and are savage and unjust.”

The government announced on Sept. 7 that it would raise workers’ social security contributions to 18 percent from 11 percent in 2013 -- an equivalent of one month’s wages -- and cut the same tax for companies to 18 percent from 23.75 percent.

A few days later the ‘troika’ of lenders -- the European Union and IMF -- said they had approved the fifth review of Portugal’s bailout and relaxed the country’s fiscal goals for this year and next. That left many Portuguese perplexed by the need for more austerity, which is set to include further tax hikes when the government presents its 2013 budget next month.

The government also said the country’s recession -- Portugal’s GDP is seen contracting 3 percent this year -- will now extend into 2013, pushing back the hoped-for recovery.

SWAMP

“Portugal returned to an unthinkable swamp just over a week ago, the worst nightmares returned, and it is difficult to understand how to get out,” wrote Antonio Costa, the director of business daily Diario Economico.

“The government lost the country, the risk now is that the country loses the ‘troika,'” he wrote in a column on Monday.

President Anibal Cavaco Silva has called a meeting of his consultative State Council on Friday and opposition political leaders have lined up to meet with him in the past few days. On Monday, social partners, including employer groups and unions meet with Cavaco Silva to discuss the situation.

Portugal became the third euro zone country last year to seek a bailout -- after Greece and Ireland -- and it had benefited from broad consensus, including from the opposition Socialists and the second-largest union, behind austerity. That had set it apart from Greece, which has faced waves of social protests.

The Socialists were tied to the bailout terms because it was the former Socialist government that was forced to seek international assistance, in April last year, before it was voted out. But new Socialist leader, Antonio Jose Seguro, has said he will vote against the 2013 budget unless it excludes the recently announced measures.

Antonio Costa Pinto, a political analyst at the University of Lisbon, said the Social Democrats had consistently argued that austerity was a necessary evil to fix past mistakes.

“The most notable part of the government’s message is that it did not use the ‘troika’ as an excuse,” said Costa Pinto.

“While centre-right governments in Spain and in Greece have used a notion of defence of the national interest against the ‘troika’, this has not happened in Portugal.”

Apart from testing the limits of acceptance for austerity by the Portuguese, that process may now also test the cohesion within the government itself -- the Social Democrats rely on the rightist CDS party for their majority in parliament.

The head of the CDS, Foreign Minister Paulo Portas, has criticised tax hikes, contending that Portugal should meet its budget goals by cutting public sector spending. That view has struck a popular chord.

“Let them make cuts in the foundations, in state companies and in public-private partnerships, that’s why I voted for the government, this is a let down,” said Figueiredo.

FINANCE MINISTER AT RISK?

Adelino Maltez, political scientist at Lisbon Technical University, said a potential casualty may be Finance Minister Vitor Gaspar.

“At this moment Gaspar has lost credibility,” said Maltez. “Substituting Gaspar could completely change the political dynamic.”

But replacing Gaspar would be risky, not least since he has has the trust of international lenders, having previously worked at the European Central Bank.

The new situation brings economic as well as political risks, especially if weak consumer confidence drags on business activity and further hits tax revenues that are already falling short.

Credit rating agency Moody’s said on Monday: “Portugal’s economic and fiscal adjustment remains highly challenging and fraught with downside risks.” Still, it expects politicians to come together again in the end.

“Since consensus between the government and the Socialists has been an important element of stability since last year’s government collapse and early election, we expect that intense negotiations, to take place over the next few weeks, will reach a broad budget agreement and avert another political crisis,” it said.

Still, financial markets took note on Monday, with government bonds falling for the first time since a rally that began at the end of July when ECB President Mario Draghi declared his determination to do all it takes to save the single currency. Ten-year yields stood at around eight percent.

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