Portugal reassures markets on debt, reforms

Portugal’s incoming prime minister moved fast Tuesday to reassure the markets of his commitment to tame the national debt, standing by a campaign pledge to go beyond the demands of a 78-billion-euro EU-IMF rescue.

Pedro Passos Coelho, leader of the centre-right Social Demcorats (PSD) which defeated the Socialists in a general election on Sunday, also said his government would lower labour costs for exports as a way to revive the economy.

“We must be more ambitious in terms of privatisations, in public media for example,” he said in an interview with French business daily Les Echos.

The PSD backs the privatisation of one of the state broadcaster RTP’s two television stations as well as the state water company and the Lisbon metro.

Partially privatising savings bank Caixa Geral de Depositos is also part of Passos Coelho’s vision as outlined in a book published in 2010 called “Change,” as a way to reduce the role of the state in the Portuguese economy.

Portugal became the third eurozone country after Greece and Ireland to seek a bailout after outgoing Prime Minister Jose Socrates resigned in March when parliament rejected his minority Scoialist government’s latest austerity measures, sending Lisbon’s already high borrowing costs sharply higher.

Last month, Greece was forced to agree to privatise more national assets in order to reach the budget targets set out in the bailout programme it reached last year with the European Union and the International Monetary Fund.

During the campaign, Passos Coelhos warned that Portugal risked following the example of Socialist-run Greece, which now needs even more money a year after it got its bailout, if Socrates remained in power.

Under Portugal’s bailout plan, Lisbon must cut its public deficit to 5.9 percent of gross domestic product by the end of the year from more than 9.0 percent in 2010 and to within a eurozone limit of 3.0 percent of GDP by 2013.

Budget cuts demanded in exchange for the three-year aid package are expected to cause the Portuguese economy to contract by around 2.0 percent this year and next.

Passos Coelho told Les Echos that since internal demand will not be able to fuel growth in the short-term, Portugal was “expecting a lot from external demand.”

He vowed to stimulate exports, in part by lowering the cost of labour for firms that export.

“That will be a way to regain export competitiveness. We have no other way, since we are in the euro zone,” Passos Coelho said.

Barclays Capital said the EU-IMF programme “may work but it will have to deliver the proposed fiscal consolidation path and, more importantly, it must succeed in raising long-term GDP growth to 1.5-2.0 percent.”

“We think this might be particularly challenging for Portugal. Over the last decade Portugal has suffered chronically low growth because of very weak productivity and a loss of competitiveness,” it added in a research note.

The Social Democrats won 105 seats in the 230-seat legislature in Sunday’s election and Passos Coelho has said he will seek to govern with the smaller conservative CDS-PP party which garnered 24 seats.

The two parties together will have a combined 129 seats, with four seats yet to be decided. They last governed in a coalition between 2002 and 2005.