With the fallout from the Cyprus bailout still fresh attention has now turned back to Portugal after the country’s constitutional courts dramatically blocked parts of the government’s austerity budget throwing the €78 billion bailout into doubt.
The decision has now left a black hole in the budget, a hole that needs to be plucked according to the European Union. In a desperate move embattled Prime Minister Pedro Passos Coelho announced that that the country’s health and education budgets will have to be slashed in order to avoid a second bailout.
It is now two years on since Portugal asked for help but it remains in the grip of recession and a financial emergency.
Passos Coelho told the nation his government would begin the “very difficult” process of slashing spending rather than raising taxes further.
“I shall instruct ministries to implement necessary reductions in functional spending to offset what the court ruling prohibited. It will certainly be a very difficult process,” He added that while he respected the court, its ruling would hamper government plans to take back control of its own finances from international lenders next year.
Comments made by EU economic affairs Chief Olli Rehn who hinted that large bank depositors may be affected in any new bailouts has caused concern to Portuguese savers.
Gary Jenkins of Swordfish Research says that some Portuguese savers may be feeling jittery, having watched the Cyprus bailout unfold:
“Throughout the crisis whilst many politicians have managed to talk themselves (or more pertinently the countries borrowing costs) into trouble it has appeared that the Portuguese have adopted the old mantra of the British Royal family: Never complain, never explain.
‘However they have now managed to put the country back in the spotlight, or the constitutional court has by rejecting some of the austerity measures that the government wished to put into place in order to allow them to meet the cost saving targets imposed as part of the bailout package.
The government said that it didn’t agree with the court’s ruling and that it ‘…places serious difficulties on the country to comply with the…budget targets it has to meet.’ Portugal is supposed to hit a budget deficit target of 5.5% this year. I wonder if people / companies with savings of over €100K in Portuguese banks are feeling entirely comfortable with the situation.”
The Euro weakened as a result of the Portuguese situation and as investor sentiment across the Eurozone fell. The monthly measure of investor confidence dropped to -17.3, its lowest reading since November 2012, a big drop compared to March’s -10.6. The Cyprus bailout is thought to be the main reason.
The data suggests that the goal of creating growth across the region is failing and that no green shoots of recovery are anywhere in sight. The EU’s belief that the situation will improve later and in 2014 seems to be wishful thinking.
As of 10:45am
The Euro to Pound Sterling exchange rate is currently trading in the region of 0.8492
The Euro to US Dollar exchange rate is currently trading in the region of 1.3004
The Euro to Australian Dollar exchange rate is currently trading in the region of 1.2524
The Euro to New Zealand Dollar exchange rate is currently trading in the region of 1.5429