Portuguese President Anibal Cavaco Silva has warned the European Union and International monetary fund that the current course of strict austerity measures has made the nation ‘socially unsustainable’.
Over the course of the past year Portugal’s unemployment rate has surged from 13.7% to 16.3% reaching as high as 39% for youths under the age of 25. Ominously this figure is set to rise further as the next bout of austerity measures has not yet come into force.
In a speech to the nation, Silva said that Portugal would “honour its international obligations”, but called for a tough line with the European Union-International Monetary Fund Troika over the pace of fiscal tightening under Portugal’s €78bn (£63bn) loan package.
“We have arguments, and we should use them firmly,” he said.“Fiscal austerity is leading to declining output and lower tax revenue. We must stop this vicious circle,” he said, cautioning the Troika that there would be no way out of the crisis until policy was set in the interests of the “Portuguese people” as well as foreign creditors.
Silva’s speech comes after he rebuked the nations prime minister and asked the constitutional court to rule on the legality of tax rises due to come into force this month as well as plans to slash the welfare state and sell off the nations assets.
Markets have so far brushed off worries that the country risks a Grecian vortex as austerity bites in earnest. Yields on 10-year Portuguese bonds plummeted 30 basis points to 6.76% on Wednesday as relief over America’s budget deal fuelled optimism across the world.
“Investors are willing to give Portugal the benefit of the doubt right now, but the country still hangs in the balance,” said David Owen from Jefferies Fixed Income. “Our concern is that the fundamental economic situation is still getting worse. The European Central Bank’s policy is still too tight. They need to do quantitative easing and cut overnight rates below zero,” he said.
The new austerity measures are set to increase income tax rates by as much as 3.4% and introduce many other charges and fees for public services. Popular anger is rapidly increasing across a country that has until now appeared to be biting the bullet and getting down to the business of saving their country. Now however even the stoic Portuguese are being driven to breaking point. Last autumn saw the biggest street protests since the nation emerged from the shadow of dictatorship in 1974.
According to the Organisation for Economic Co-operation and Development the Portuguese economy is expected to contract by 1.8% in 2013 following a contraction of 3.1% last year. Public debt has risen to 133% of GDP. These figures are in stark comparison to Citigroups forecast that the economy will in fact shrink by as much as 4.6%. Such a weakening will have severe consequences for the markets and could spark a situation similar to Greece.
Portugal’s troubles are a stark reminder that the Euro crisis is far from over.
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