2.6.11

 
"Portugal Bailout Brings Long-Prescribed Medicine: Euro Credit"

Por Jim Silver, Bloomberg, 2 de Junho

Douro Azul SA, an operator of river cruises in northern Portugal, had a problem with a manager at a hotel it owned: He was pinching money from the petty-cash box. When the debt ran into hundreds of euros, the company tried to fire him. “For me, a case like that would be sufficient for immediate dismissal, but the court didn’t think so,” said Mario Ferreira, Douro Azul’s founder and chairman.

Ferreira, like many Portuguese employers, found that what he thought was a clear instance for firing didn’t persuade labor courts. Portugal’s constitution says employees may be dismissed for “just cause.” Actually doing so is hard enough that the European Union and International Monetary Fund made changes in worker-dismissal rules a condition in the nation’s 78 billion-euro ($112 billion) rescue last month.

As with Greece, investors are skeptical Portugal will swallow its bailout medicine, which includes slashing spending, raising revenue and imposing structural changes long prescribed
by economists and executives such as Ferreira. The yield on the country’s 10-year bond rose this week to 9.77 percent, more than three times Germany’s rate, as Portuguese voters prepare to go to the polls on June 5 to elect a new government.

In exchange for aid, Portugal agreed to reduce workers’ severance payments, bringing them in line with the EU average. It also vowed to keep private-sector wages from growing faster than productivity; facilitate entry into the telecommunications market, and enhance phone and energy regulators’ powers; phase out rent control; and merge some of its 308 municipalities.

‘No Political Will’

“The measures seem to be everything that businessmen have been talking about for a long time,” Ferreira said in an interview. In the past, “there was no political will. Now they
can say the measures have to be implemented because they were demanded by the troika,” he said, referring to negotiators from the EU, the European Central Bank and the IMF.

Socialist Prime Minister Jose Socrates sought the aid on April 5 after parliament rejected his proposal for extra deficit cuts amid a surge in borrowing costs, a move that prompted his
resignation and early elections. Portugal is the third bailout victim of Europe’s debt crisis after Greece and Ireland. The extra yield investors demand to hold 10-year Portuguese bonds over German bunds of similar maturity has risen more than 200 basis points to 670 since the Social Democrats and People’s Party rejected Socrates’s austerity plan. The two parties now say they’ll join the premier’s Socialists in respecting the restrictions of the bailout package.

Default Insurance

The cost of insuring against a Portuguese default reached a record today as investors increased bets the country won’t be able to make good on its borrowing. Credit default swaps on the nation’s debt rose 11 basis points to 700. “Everybody knew that sooner or later we would smash against a wall,” said Peter Villax, president of the Portuguese Association of Family-Owned Companies and vice president of biomedical firm Hovione FarmaCiencia SA. “What a pity Portugal can only have good government when it is forced upon us.”

Spending cuts and revenue increases, intended to trim the budget deficit to 3 percent of gross domestic product in 2013 from last year’s 9.1 percent, are contributing to the worst
economic slump in decades. Portugal’s economy already has among the weakest growth rates in the euro area, expanding less than 1 percent on average in the decade through 2010.

Two-Year Contraction

While the government forecasts that GDP will contract 2 percent both this year and next, the economic overhaul may slowly ease the pain. Loosening labor restrictions may add 1.1
percent to GDP over 10 years, and increasing competition for non-tradable goods such as phone services may lift economic output by 1.9 percent, the IMF estimated last year.

Portugal made the most progress toward liberalizing labor rules from 2003 to 2009 among 28 Organization for Economic Cooperation and Development member countries, according to an
OECD study. Still, Portugal’s rules ranked as the eighth-most restrictive among 30 countries.
“In the past, there’s been enormous pressure to stop measures like these, to water them down,” said Pedro Magalhaes, a politics researcher at the University of Lisbon. “The narrower the next coalition is, the harder it will be to implement the measures” as the opposition often teams with special interests to block reforms, he said.

Opening up the rental market would help rehabilitate thousands of apartments that are poorly maintained because they generate so little income, the Association for Public Works and
Construction estimates. Housing requires about 74 billion euros of renovation work, which may generate revenue of 535 million euros a year, according to the Lisbon-based group.

Legal Process

Bailout terms also call for steps to speed the flow of court hearings. The number of civil cases pending rose by about 50 percent in the decade through 2009, according to the Justice
Ministry. “The courts are full of cases; nothing happens,” said Carlos Barbot, chief executive officer of paint producer Barbot-Industria de Tintas SA, adding that it’s taken his company more
than a decade to collect on back payments through the courts. “Sometimes they make an agreement to pay, and then they pay or they don’t pay.”

The Bank of Portugal said May 19 that “strict” adherence to the rescue terms is “desirable and unavoidable,” warning that broad political and social support is needed to defeat “vested interests” opposed to change. Ferreira, the Douro Azul chairman, isn’t optimistic that
elections will produce a government that will live up to Portugal’s commitments. “We need decision-makers who work like managers,” he said. “To be honest, from what I see of the ones we have, it’s almost impossible.”

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