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Portugal top court blocks austerity pensions cuts

Published on 20/12/2013

Portugal's constitutional court on Thursday blocked a key and controversial austerity measure in the 2014 budget that provides for cuts of up to 10 percent in civil service pensions.

The ruling, which had been highly awaited by the markets, comes three days after the government said the troika of creditors — the European Union, International Monetary Fund and European Central Bank — approved the country’s performance so far under its 78-billion-euro ($107-billion) bailout agreement six months before the programme is set to end.

But the 13 court judges unanimously ruled that the measure was unconstitutional as it “violates the principle of trust”, according to the judgement that was read by a court spokesman.

Savings under the reform of civil service pensions are key to the government’s declared target of bringing the public deficit down to 4% of GDP next year.

The savings have been estimated at 388 million euros, or one tenth of the austerity measures that total 3.9 billion euros.

The government must now find the funds elsewhere.

The green light from the “troika” of lenders paved the way for the indebted eurozone nation to receive its next tranche of 2.7 billion euros in financial aid from its bailout.

The “troika” granted Portugal the 78-billion-euro bailout in May 2011, with the country obliged to undertake tax hikes and spending, benefit and wage cuts in order to unlock the funds.

Portugal has so far received 71.4 billion euros of the bailout money it was promised.

Portugal’s centre-right coalition government hopes it can exit its bailout as planned in mid-2014 and return to financing itself fully in debt markets, just as Ireland is doing this month.

But it has said it could request some sort of precautionary loan from creditors after the exit.

“If the cuts to pensions are ruled out by the court, Portugal must quickly present a credible alternative or else its borrowing rate risks spiralling upward,” Pedro Lino, an analyst at Forex trading broker Dif Broker, said earlier.

The bailout terms have deepened an economic downturn triggered by the world financial crisis in 2008 and sent the jobless rate soaring to record 17.1 percent in the first quarter of 2013.

But the jobless rate dipped to 16.4 percent in the second quarter as the country emerged from a two-and-a-half-year recession with growth of 1.1 percent.

The Bank of Portugal predicts the country should post growth of 0.8 percent next year, pulled by rising exports. It sees the economy contracting by 1.5 percent this year.