Portugal is at crucial budget crossroads: prime minister

(LISBON) - Portugal is at a crucial budget crossroads, fighting for credibility on financial markets and political stability at home, Prime Minister Jose Socrates warned when opening a crisis budget debate on Wednesday.

Socrates told parliament that "the road will be difficult and demanding" and that the budget was "crucial," just as eurozone finance ministers were conferring by telephone on a dire debt situation in Greece.

The right-wing opposition here has already said it will abstain in the vote, ensuring passage for the minority Socialist government's financial measures.

Portugal faces huge strains in its public finances, which has raised concern on international markets that it might be at risk of following Greece as a critically weak link in the eurozone.

Meanwhile, the government issued bonds to borrow 3.0 billion euros (4.14 billion dollars) to help cover holes in its public finances and attracted bids for about 12 billion euros, the Portuguese debt management agency reported.

However, reports in the financial press said that the 10-year issue, announced on Tuesday, would have to carry fixed interest of 4.8 percent to attract bidders, "the highest yield since 2002," the online edition of the Jornal de Negocios newspaper reported.

But since Tuesday, downward pressure on Portuguese bonds, which has the effect of pushing up the fixed interest as a percentage of the price, has eased on rumours that members of the European Union might be about to announce help for Greece.

On Tuesday, the yield on the Portuguese 10-year bond fell to 4.613 percent from 4.783 percent on Monday, and was down to 4.473 percent on Wednesday.

But on February 3, a Portuguese 12-month bond issue to raise 500 million euros flopped, attracting bids worth only 300 million euros.

Socrates, who lost his outright majority in legislative elections in September, noted in his budget remarks on Wednesday that abstention by the opposition assured approval for the latest budget.

However, "on this vote depends not only political stability but also the credibility of macroeconomic management and the confidence of economic decision-makers in the Portuguese economy."

The Portuguese public deficit has risen from 2.7 percent of national output in 2008 to 9.3 percent in 2009, the highest level since the installation of democracy in 1974.

"The government will assume, without hesitation, the consequences of the need to reduce the deficit to within the limits of the Stability Pact," of 3.0 percent of gross domestic product, he said.

The government has already frozen civil service pay for this year, and civil servants have called a national strike for March 4.

The government has said it intends to reduce the public deficit by one percentage point to 8.3 percent in 2010. By the end of this month it must present its programme for financial stability and economic growth to the European Commission.

Portugal is a member of the European Union and of the eurozone.

Socrates said that in this document, "Portugal will guarantee its undertakings and will provide details on how it will achieve the target" of a deficit of 3.0 percent of GDP.

The programme would be "debated with parliament and the social partners to obtain the widest possible consensus."

"The road will be difficult and demanding but it is a road which we have already taken with success," he said, recalling that his government had reduced the deficit from 6.1 percent of output to 2.6 percent between 2005 and 2007.

"This is one of our strengths: having already shown that we carry out our commitments," he said.

In the eurozone, the public accounts cover the central state, welfare and local authority budgets.

Under EU rules, countries are supposed to workd towards budget surpluses in times of growth, and are permitted to run a maximum deficit, or annual overspending, of 3.0 percent of output essentially to allow room to stimulate their economies in times of downturn.

Many EU and eurozone countries have experienced great difficulties in reducing their deficits towards zero even before the recent financial crisis and massive government stimuli.

National debt, made up of accumulated past deficits, is required to fall structurally towards 60 percent of annual national production, and then further, but some countries have debt in excess of this limit.