Portugal’s Bailout Plan May Need an Extension

Both Moody’s and Fitch ratings have both warned that Portugal may need to extend its bailout plan due to the public outcry against further tax increases and the continued weak economy which are likely to delay the recovery.

Moody’s is anticipating that Portugal may require financial support to be extended beyond September next year, and is fully expecting that the country will receive another European Union/ International Monetary Fund programme before regaining access to government bond markets.

It looks likely that more austerity measures will be necessary for Portugal to keep on track with its deficit reduction program even though fiscal targets were relaxed last month. This is because the measures needed to meet even the easier targets are more substantial than expected, and this is at least partially due to a decline in revenue.

Portugal is currently in a €78 billion bailout program that is due to end in June 2014, and the country is currently expected to gradually regain access to long-term debt markets by September 2013. At the moment Lisbon is insisting that the adjustment program will not need to be extended. This is in spite of the fact that the government decided not to go ahead with a planned social security reform after extensive protests, and the country has also had significant shortfalls in tax revenue.

The Social Security reform has been replaced with large tax increases that will be the equivalent of around 2% of economic output next year. However the government’s decision to reverse its social security reform plan has led to worries that demonstrations will be mounted in the future to overturn any unpopular economic decisions. The biggest trade union federation in Portugal has already called a general strike for next month.

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