Portugal Negotiates Draconian Bailout Plan
EUROPE, 25 Apr 2011
Mario Queiroz – TerraViva Europe
The strangling of the Portuguese economy by the international capital markets has led to what was expected: a bailout with tough conditions that will bring the country to its knees.
The administration of José Sócrates – who resigned as prime minister last month but is staying on as caretaker until a new government is formed – is negotiating with the same organisations that held talks with Ireland and Greece: the International Monetary Fund (IMF), the European Financial Stability Facility (EFSF) and the European Central Bank (ECB).
The conditions of the estimated 80 billion euro (116 billion dollar) bailout should be set within the next week or two, when a report will be sent to the European Union Council of Economic and Finance Ministers.
The report will lay out the targets that Lisbon will have to meet in order to receive quarterly loans.
To the surprise of analysts, the IMF has shown a more human face than the EU in the talks, proposing drastic measures but ones that would have less of a social impact than the more stringent demands set forth by the European Commission, the EU’s executive arm.
The IMF is concerned about Portugal’s potential GDP and wants to establish a margin for growth, while the EU wants to slash this country’s deficit and debt no matter what the cost, demanding higher interest rates than the Washington-based international lender is calling for, to finance the bailout.
Local experts believe that by insisting on lower interest rates, the IMF is trying to ward off or at least ease the expected recession, through investment in companies to reduce unemployment.
Former Portuguese socialist president Mario Soares (1985-1995) described the voice of the IMF, which has surprised observers with its positions, as “more sensible.”
He told IPS that this is explained by the fact that “24 of the 27 EU governments are today ultra-conservative, completely indifferent to the values of European unity.”
Asked by IPS about the different approaches in the negotiations, economist Mario Gomes said that “in recent years, the IMF has proposed, in several countries, a policy that combines economic growth with an increase in exports and a lower interest rate, while the ECB and the EFSF seek political subordination, in this case of Portugal.
“The idea is to leave Portugal scared and without negotiating capacity in the future, in order to keep it reduced to a protectorate, and at the same time shield Germany’s banking system with more funds, and the European investment bank with its money, which is German money,” said the University of Lisbon economy professor.
“European solidarity? This is nothing more than interests that converge in joint business concerns; all the rest has been German rhetoric and tactics,” he said.
The lenders are negotiating with an outgoing socialist government, which will remain in place until the early general elections on Jun. 5.
The conservative Social Democrat Party (PSD), which enjoys a strong lead in the polls for the elections, will have to forge an alliance with the right-wing nationalist Social Democratic Centre party (CDS).
The first round of negotiations took place against a backdrop of new bad news for the Portuguese economy. The IMF forecasts that Portugal’s GDP will shrink 1.5 percent this year and 0.5 percent next year, running counter to the global trend of economic improvement after the international crisis that broke out in the United States in 2008.
In other words, Portugal is set to become one of the last countries in the world to pull out of recession.
With an eye to the future, even though there are no major underlying ideological differences between the governing Socialist Party (PS), the PSD and the CDS in terms of economic and financial strategy, the IMF, ECB and EFSF met this week with both right-wing opposition parties.
The visiting delegations also invited the three left-wing parties – the Left Bloc, the Portuguese Communist Party (PCP) and the Greens – who control the trade unions, to a meeting, almost as a courtesy gesture. But the parties decided not to attend.
The leftist parties criticised what they called Sócrates’ “surrender” to the “threats” of the banks and the EU, which are demanding more sacrifices and more privatisations, which would reinforce Portugal’s dependence.
The central trade unions are lamenting the bailout. The socialist-affiliated UGT and the Communist-led CGTP see the request for aid as a result of the pressure that the banks have put on the government, and say it will further undermine the social state and the future of public enterprise.
Although the talks are in the early stages, the conditions to be set by the multilateral lenders to rescue Portugal’s fragile economy have begun to be reported.
The main prescriptions include a massive privatisation plan, a more flexible labour market that would make it cheaper and easier to fire workers, significant public spending cuts, a freeze on wages and pensions, and an increase in taxes, with a view to reducing the deficit in the balance of payments.
Other possible austerity measures could be cuts in unemployment benefits and income tax benefits and deductions, an increase in the value-added tax, and the elimination for several years of the holiday bonuses, which are two extra monthly salaries a year.
Hard times lie ahead, and there is no guarantee that the people of Portugal will see relief any time soon. “Portugal is now a protectorate of the EU and the IMF,” wrote economics journalist Nicolau Santos, deputy director of the Lisbon weekly Expresso, commenting on the negotiations.
As demonstrated by other cases, the rescue to stave off collapse does not necessarily represent a solution. The shadow of Greece and Ireland fuels scepticism. Nearly a year after it started receiving external aid, the Greek economy is in recession and unemployment continues to grow, while Ireland’s GDP fell by one percent in 2010.
In the current context, especially in the case of a country with a modest, fragile economy, there is strict observance of the path outlined by the EU, which is conducive to the equivalent of a scorched earth policy in the social sphere and to the application of the law of survival of the fittest in the economic and financial spheres.
Whoever takes the reins after the June elections will not be able to resist the external pressure to continue turning private debt into public debt, especially the toxic assets of the banking system, with the increasing transfer of public money to the private sector.
The Portuguese describe themselves as people with “gentle manners” who don’t take to the streets to attack banks, loot supermarkets or set cars on fire. But desperation is growing, as people look ahead to an uncertain future.
A domino effect could also put Spain at risk, in which case the worst outcome – a financial collapse in the entire euro zone – is feared.
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