Portuguese budget slips as international auditors arrive

(LISBON) - International creditor representatives were back in Portugal on Tuesday to check on its progress meeting budget targets that are proving elusive and might lead Lisbon to seek easier terms.

Like many heavily-indebted eurozone countries, Portugal is in an economic recession exacerbated by sharp budget cuts which took effect starting in May 2011 as Lisbon was granted a bailout worth 78 billion euros ($97 billion).

On Thursday, official figures indicated that the government would probably miss its target of cutting the public deficit to 4.5 percent of output this year unless it found ways to tighten the budget further.

Auditors from the so-called creditors troika of the European Central Bank, European Union and International Monetary Fund find themselves faced with the question of demanding more rigour or cutting Lisbon some slack.

They could also compromise at the end of a two-week visit by doing a bit of both.

"Barring any new measures, the deficit could reach almost 6.0 percent of GDP," or gross domestic product, this year, analysts at the French bank BNP Paribas said in a research note.

They forecast that Portugal's current fiscal targets would probably be amended, but that "given the size of the slippage, new targets could be accompanied by additional savings" measures.

Eurozone countries are supposed to run public deficits of no more than 3.0 percent of GDP, and to work towards a balance or even a surplus in times of economic growth.

Portugal is one of three eurozone countries now receiving international financial aid, along with Greece and Ireland.

Greece has managed to renegotiate some terms of its bailout, and is now pushing for an extension, and Portugal could well try to obtain better terms as well.

But as he finished his summer holiday, Portugal's centre-right Prime Minister Pedro Passos Coelho insisted that the government's finances would be brought under control and said the country was "closer to beating the crisis."

He did not speak about the visit of the auditors however, which will represent their fifth review of the Portuguese programme.

If they approve the government's current measures, Portugal is to receive a loan installment valued at 4.3 billion euros, on top of the 57.1 billion already paid out.

In mid-July however, troika representatives voiced concern over risks to Portugal's budget targets owing to declining tax receipts.

"If fiscal revenues continue to fall, (budget) targets are at risk," IMF mission head Abebe Selassie said.

Opposition leaders in Portugal's Socialist party and some observers argue that Portugal cannot take any more austerity measures, pointing to a forecast economic contraction of 3.0 percent of GDP this year.

Unemployment also hit a record level of 15 percent of the workforce in the second quarter, and tightening the fiscal screws further would very likely push that even higher.

Any easing of the troika's loan terms to Portugal would undoubtedly lead to similar calls from Greece and possibly Ireland as well.

"How could you explain easing terms for the Portuguese when you don't do the same thing for the Greeks," asked an editorialist at the daily Jornal de Negocios.

Greece is pushing for a two-year extension to the period in which is is expected to come up with substantial spending cuts and privatisation revenues.

But Lisbon can point to the fact that it has respected "the vast majority of demands" by its creditors, the daily Diario Economico said.

"It is undeniable today that in the eyes of all, Portugal is a different case than Greece," it added.

Troika auditors will also be helping government officials draw up a 2013 budget, which could be tricky since the country's constitutional court overruled a proposed suspension of year-end payments to civil servants and pensioners equivalent to two months of wages.

To bring the public deficit back down to 3.0 percent of GDP, the government will now have to implement additional measures that affect the population as a whole.