OE 2011, lá fora....

Talks on Portuguese budget collapse

By Peter Wise in Lisbon

Published: October 27 2010 16:36 | Last updated: October 27 2010 20:55

Talks between Portugal’s socialist government and the main opposition party over a disputed austerity budget have collapsed, pushing the country closer to a sovereign debt crisis.

The opposition Social Democratic party (PSD), which holds the balance of power in parliament, called a halt to five days of negotiations on Wednesday, accusing the minority government of being inflexible.

However, Miguel Relvas, PSD deputy leader, left open the possibility of a compromise, saying the party would not make a final decision until shortly before next week’s parliamentary vote on the bill.

“Because of the exceptional gravity of the situation, we are prepared to give the government more time to consider our proposals,” he said in a televised address on Wednesday night.

A political deal guaranteeing that the budget bill will be passed is considered essential to reassure financial markets that the minority government will meet its deficit-reduction targets.

Fernando Teixeira dos Santos, finance minister, said a defeat of the bill would cause “a deep financial crisis” and cut off finance to the economy.

Immediately after the talks collapsed the yield on Portugal’s benchmark 10-year government bonds increased 20 basis points to 5.83 per cent, the biggest rise in more than a month.

The budget bill could still be passed if the PSD abstained in the vote scheduled for November 3. But continuing uncertainty over the vote’s outcome is likely to see government borrowing costs come under renewed pressure.

Mr Relvas also called into question Portugal’s budget target for 2010, saying the negotiations suggested the government would not meet its objective of cutting the budget deficit from 9.3 per cent of gross domestic product in 2009 to 7.3 per cent this year.

The austerity measures proposed by government include a 5 per cent cut in public sector pay, a state pension freeze and higher value added tax. The bill is designed to reduce the budget deficit to 4.6 per cent in 2011.

Copyright The Financial Times Limited 2010