Euro crisis: Portugal's bid to stop the rot

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Euro crisis: Portugal's bid to stop the rot

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The government has cancelled Christmas, some are saying!

Unions in debt-ridden Portugal are up in arms at the decision to impose a one-off tax equal to 50 percent of the festive bonus. Santa Claus may not approve but it should bring one billion euros into state coffers and demonstrate Lisbon’s eagerness to reimburse its international bailout.

Urgent action is needed. Portugal’s public debt represented 93 percent of gross domestic product in 2010. This year, the debt is expected to surpass 100 percent of GDP and rise further in 2012.

In his first European summit after June’s election, Portugal’s new premier was keen to show his country can react more quickly than Greece.

“We won’t rest until we have repaid the trust put in us,” Pedro Passos Coelho said. “I can assure you we are doing everything in our power, with the European Commission, the ECB and IMF to make a success of the austerity programme.”

After three austerity plans from the former Socialist government, the new centre-right coalition must now pursue further tax reforms, cuts in state spending and privatisations in return for the rescue.

Such decisions risk exacerbating the social cost of the crisis with unemployment set to rise from 12.5 percent this year to more than 13 percent in 2012. The number of people earning the minimum wage has doubled in the last six years.

The main challenge is boosting growth. The economy has been virtually stagnant in recent years and looks set to contract, at least in the short-term. Hence doubts in the financial world over Lisbon’s ability to repay its 78 billion euro loan without new austerity measures and a new bailout.

Giving investors even greater jitters, Moody’s has lowered Portugal’s credit rating to junk status. Some in Lisbon decided to return the compliment, symbolically putting junk from the city’s streets in the post to be sent direct to Moody’s in New York.