Portugal on edge of abyss despite doing "everything right"

By Sinikka Tarvainen Feb 15, 2012, 16:03 GMT

Madrid - Portugal is not Greece, Portuguese leaders have repeatedly stressed. But the likelihood of Lisbon following Athens in seeking a second bailout is growing by the day.

'We shall not allow what happened in Greece to happen here,' Prime Minister Pedro Passos Coelho said recently.

Yet many analysts already regard it as inevitable that Lisbon will need a second financial rescue package, estimated at 30 billion euros (40 billion dollars). The initial bailout, worth 78 billion euros, was granted by the European Union and International Monetary Fund (IMF) in May.

Despite assurances until now that Portugal will neither need more money nor time to meet the fiscal targets agreed to under the bailout deal, Finance Minister Vitor Gaspar already discussed that possibility with his German counterpart Wolfgang Schaeuble in Brussels last week.

A Portuguese broadcaster showed Schauble telling Gaspar that Berlin was ready to support eventual changes to Portugal's bailout programme, to which Gaspar answered that it would be 'much appreciated.'

Such a situation would undoubtedly appear unfair to Passos Coelho's conservative government, which feels it has done everything right.

Portugal has adopted austerity policies that Gaspar described as the toughest since the country became a democracy following the 1974 Carnation Revolution.

Lisbon has slashed spending, raised taxes, launched a privatization programme and reformed the labour market. It has gone even further than its creditors requested, in a bid to convince financial markets of its solvency.

Cuts in areas such as health and education, together with an unemployment rate of nearly 14 per cent, have contributed to what charities have described as an alarming rise in poverty.

Dwindling domestic consumption is now contributing to Portugal's worst recession in decades. The economy contracted 1.5 per cent in 2011 and is expected to shrink twice as much this year.

An estimated 300,000 people marched against the austerity measures in Lisbon at the weekend, calling for an end to 'outside interference' from the EU and IMF.

The sacrifices have, however, satisfied the EU, which praised Portugal's 'good progress.' Lisbon met its target of trimming the budget deficit to 5.9 per cent of gross domestic product (GDP) in 2011, though it was partly thanks to a one-off transfer of banks' pension funds to state coffers.

The so-called troika of the EU, IMF and European Central Bank will be in Lisbon this week for a third assessment of Portugal's performance under the bailout deal. It was expected to be satisfied, as it has been so far, and to release a new loan tranche from the total of 78 billion euros.

So why is Portugal edging closer to having to seek a new bailout? Analysts attribute its woes largely to market concerns over a knock-on effect from Greece, combined with the recession.

Portugal's economic growth has been slow for a decade. Experts blame the problem on a number of factors, including low productivity and an excessive reliance on low-tech sectors such as construction and tourism.

Passos Coelho's reforms aim at correcting some of the problems, such as a rigid labour market. But not everyone is convinced.

Economist Jose Antonio Ferreira Machado told the Spanish daily El Pais: 'I have the impression that neither markets nor anyone knows what Portugal can do to start growing.'