BRUSSELS – Portugal announced new spending cuts, on Friday, to try and restore confidence in its finances ahead of a euro zone summit that is likely to back a plan to boost competitiveness but defer decisions on a stronger rescue fund. A German government source said there were positive signals that Greece and Ireland, which received EU/IMF bailouts last year, might also announce new moves at the summit, opening the way for EU paymaster Germany to offer them more help.
Chancellor Angela Merkel was ready to support some easing of the terms on their bailout loans if Athens speeded up promised privatisations and Dublin was more forthcoming on a common corporate tax base in the euro zone, the source said. But new Irish Prime Minister Enda Kenny said Dublin would resist German efforts to introduce a common corporate tax base. “This would be a harmonisation of tax by the back door,” he said in comments broadcast by RTE state radio.
Greece said that weaker than expected revenues and higher spending had widened its state budget shortfall in the first two months of 2011, blowing it off course in its efforts to meet the tough fiscal targets set out by the EU and IMF. Moody’s slashed Athens’ credit rating by three notches on Monday citing a heightened risk of default. The euro, which suffered its biggest one-day fall against the dollar in a month on Thursday, languished near a one-week low and Portuguese bond yields rose despite the budget measures amid growing market doubts that leaders can bridge differences on how to solve the region’s fiscal woes.
The slow pace of European crisis management has piled pressure on Portugal to seek an EU/IMF bailout. Prime Minister Jose Socrates has resisted, saying it would be a national humiliation. In a last-ditch attempt to convince investors that its finances are sustainable, his government announced new cuts worth 0.8 percent of gross domestic product this year and structural reforms that it said would push its deficit down faster. The measures include cuts in spending on social welfare and infrastructure. Changes to labour market rules are also planned, including a reduction in layoff payments.
European Monetary Affairs Commissioner Olli Rehn welcomed the “clear and important” Portuguese steps, which he said would help Lisbon regain control over its debt and end uncertainties. But investors were skeptical. “This is Portugal still desperately trying to prove that it has the political will to push through these painful measures,” said Colin Ellis, chief economist at BVCA in London. “Ultimately, however, interest rates they are paying in the market are unsustainable. There’s still a good chance they will need some support at some stage.”
Austrian Finance Minister Josef Proell urged Portugal to learn from the lessons of Greece and Ireland, saying “Don’t be too late. Make your decision soon: yes or no.”
Germany doused market expectations of a breakthrough on the rescue fund at Friday’s summit of the 17-nation currency area, saying the most that should be expected is an agreement on a “competitiveness pact” it put forward with France last month.
