It is becoming an infamously familiar chain of events in the Eurozone; public debt mounts, markets react, volatility and uncertainty rule while negotiations take place, a bailout with strings attached is agreed to and austerity follows. Public budgets are slashed, taxes hiked and social unrest ensues. Portugal is in the middle of the sequence, trying to obtain an extension of the maturities of its emergency loans beyond 2022. This is proving more difficult than expected, since the country’s Constitutional Court rejected four out of nine austerity measures from the budget. The rejected measures included an elimination of summer holiday bonuses for public sector workers and pensioners, cuts to unemployment and to sickness benefits.
Only two options remain for Portugal:drafting a supplementary budget specifying savings in the region of €1.5bn elsewhere or renegotiating the terms of the bailout. Further tax hikes have been ruled out by Portugal’s Prime Minister, Pedro Passos Coelho, reflecting the fact that the increases implemented in the January budget are the largest ever to hit Portuguese tax payers, as the standard income tax rate rose from 24.5% to 28.5%. Already, curbed consumption has fallen more than projected and motivated an increase in the 2013 budget deficit ceiling to 5.5% of GDP – a target which looks less and less likely to be fulfilled.
Additional savings are going to be very hard to find. PM Passos Coelho says there will be cuts to spending on health, education and social security as well as to budgets of state-owned companies to keep the €78 billion bailout programme on track (of which €61 billion has already been paid). All of those are going to be extremely unpopular with the Portuguese, and pressure from the opposition to force through the resignation of the current government is mounting. The possibility of a premature general election is starting to appear a rather plausible scenario, not least given that the government of Pedro Passos Coelho has survived four no-confidence votes to date, eroding any trace of consensus between the Socialists led by António José Seguro and Passos Coelho’s centre-right coalition. This comes at a critical time when unity and decisiveness are most needed.
On the topic of likely scenarios, include a second bailout to that list. Following the Constitutional Court ruling that rejected nearly half the proposed austerity measures in the budget, Portugal investigated the option of paying public employees in treasury bills. Such a plan B would in effect be equivalent to “…forcing them [..] to lend the Treasury the money the court said it couldn’t cut from their paychecks.” The move would allegedly “save an estimated €1.1 billion in expenses, narrowing the budget gap significantly”. Desperate times call for desperate measures, and although the proposition was denied at the time by a government spokesperson, it suffices to indicate just how dire the financial situation is. The idea of substituting paychecks for treasury bills is ludicrous of course, and Brussels maintains that Portugal must stick to the budget targets to qualify for a much-needed extension of loan repayment – targets which are rapidly falling into the region of utopia. Portugal will need a second bailout, unless heed is paid to Mário Soares, Portuguese Prime Minister in 1976 – 1978 as well as 1983 – 1985, and the 17th President of from 1986 – 1996. He calls for an Argentine-style default, emphasising that Portugal cannot pay its debts. And, as Mário says with an almost childish logic: “when you cannot pay, the only solution is not to pay. ”
