Portuguese govt defeated on austerity plan; market fears about eurozone debt problems to mount

Portuguese govt defeated on austerity measures

LISBON, Portugal — Portuguese opposition parties defeated a government austerity plan on Friday and passed their own bill that lets the country’s autonomous regions rack up even more debt. The move raised new questions about European countries’ ability to control their swollen budget deficits.

The vote was also likely to rattle the world’s financial markets, which are already concerned that the financial troubles gripping Greece may spread to other vulnerable eurozone countries such as Portugal and Spain.

Portugal’s minority Socialist government had fiercely opposed the opposition bill, since it contradicted earlier promises to crack down on ballooning debt. Yet the bill passed 127 to 87, appearing to show that Portugal, western Europe’s poorest country, has little appetite for painful austerity measures.

Later Friday, some 30,000 civil servants marched through downtown Lisbon to protest a public sector pay freeze — another unpopular debt-reducing measure. Unions say they will also organize strikes.

The government’s defeat in Parliament came after senior officials spent hours in closed-door meetings trying to hammer out a compromise. The government says the opposition bill punches a euro400 million ($550 million) hole in its budget over the next four years by allowing the regions to go deeper into debt.

Despite the setback, the government has shown no intention of resigning.

Minister for Parliamentary Affairs Jorge Lacao described the opposition bill as “irresponsible,” saying it sent “an extremely negative signal” to international markets.

“For (a government) to have credibility in its management of spending, for it to inspire confidence in the country and in international markets, we need to be in charge of budgeting,” Lacao said, adding that the government will try to alter the 2010 state budget to nullify the opposition measure.

That could bring further political friction, however, as right-of-center parties have previously promised to abstain from the state budget vote next month, ensuring its passage.

Portugal’s 2009 deficit is expected to hit 9.3 percent of gross domestic product, a national record. The government has pledged to bring the deficit to below 3 percent — the limit for countries using the shared euro currency — by 2013 by cutting government jobs, freezing civil servants’ pay and curbing other spending. So far, it has not raised taxes.

In addition, Portugal’s public debt is expected to climb to 85.4 percent of GDP this year, up from 76.6 percent in 2009, as the government invests in the economy and increases welfare payouts amid rising unemployment.

The Socialist government had proposed capping the debts of the Azores and Madeira autonomous regions, which receive money from Lisbon. The regions have resorted to loans to make up what they claim is a shortfall in what they need. Madeira already has debts of euro1.2 billion ($1.6 billion), according to the government.

The opposition bill allows them each to add euro50 million ($68 million) of debt annually over the next four years.

Finance Minister Fernando Teixeira dos Santos went on television late Thursday to declare that the opposition bill would have “grave consequences” for state finances.

“We couldn’t send a worse signal at this juncture,” he said, vowing to use all the legal and political means he had to stop the bill from taking force.

After the vote, the Lisbon Stock Exchange closed down 1.4 percent.

Greece, meanwhile, is under intense pressure from markets and other European Union governments to get a grip on its deficit, which stands at 12.7 percent of economic output for 2009. Prime Minister George Papandreou’s government has pledged to reduce the deficit to 2 percent in 2013 and announced an austerity program that includes higher taxes and salary freezes for civil servants.

The program has won the backing of the European Union, although the EU will be keeping a close eye on Greece’s figures to ensure it sticks to the plan.

A Greek government default would be a serious blow to the shared euro currency, but both Greece and the EU have insisted that Greece will not need a bailout.

As in the banking crisis of 2008, the financial markets are looking at who may be next to suffer Greek-like budget difficulties.

Portugal and Spain are now in the spotlight as their public finances have deteriorated badly during the last couple of years. Italy, Ireland and Belgium are also on the radar, while non-euro member Britain has been warned that it may lose its triple A credit rating if it doesn’t introduce measures to bring its massive budget deficit down.

AP Business Writer Pan Pylas in London contributed to this report.