Last tranche of Portugal’s bailout at risk because of austerity ruling

Portugal's lenders cannot pay the last tranche of the country's bailout until a rejection by the supreme court of a series of austerity measures is resolved, prime minister Pedro Passos Coelho said today.

Mr Passos Coelho said that although the bailout had formally ended the last payment depended on conditions that had been signed off by the lenders, the International Monetary Fund and the European Union. "As there was a change in these conditions, now evidently this payment can only take place when this situation is overcome," he said.

Portugal’s supreme court on Friday struck down several austerity measures in the government’s 2014 budget, including salary cuts in the public sector, creating a fiscal gap of about €700 million this year. Formally, Portugal’s €78-billion-euro bailout ended in the middle of May. The last tranche of the bailout is worth€2.6 billion.

Mr Passos Coelho said the government would ask the court for clarification on its decision and until then it cannot guarantee its budget deficit goal for next year. The government needs to cut the budget deficit to 2.5 per cent of gross domestic product in 2015 from 4 per cent this year. “It is not possible for the Portuguese state to commit, either to the European Union or the IMF, to its deficit goal of 2.5 per cent in 2015 without being able to respond to these questions,” he said, referring to the request of clarification from the court.

"We can only resolve a problem when we know what the dimension of the problem is and we don't yet know what the dimension is," he said. Analysts have said the €700 million gap created by the court could become bigger as the court still has two other austerity measures to decide on. "From a budget point of view the government is obliged to find other measures which will almost certainly centre on raising taxes on all the Portuguese," said Filipe Garcia, head of the Informacao de Mercados Financeiros.

Reuters