Portugal Steps Back from the Financial Brink as A New Bailout Tranche is Approved

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Oct 2012 saw Finance Ministers in Europe agree a new distribution of cash to help to keep the Portuguese economy in motion. This time the amount of €4.3 billion was approved, taking the total so far from the European Union to €78 billion in a total of five different bailout tranches of cash.

In other news the ministers at the conference held in Luxembourg to decide on the fate of countries like Portugal, also decided to extend the deadline that Portugal has to get its deficit below the level of 3% of GDP to 2014.

This means that the new financial targets which Portugal now has to meet are as follows:

5% for 2012
4.5% for 2013
2.5% for 2014

These were decided upon after it became clear that the tax revenue that the government of Portugal has raised so far this year fell below expected levels. In other word, had the council of Ministers not decided to move the goalposts, Portugal was going to miss scoring by a wide margin in any case.

It remains to be seen whether the new figures that the Council of Ministers have agreed with Portugal are in fact achievable, or whether once more they will simply have to change the rules of the game in order to help out the Eurozone countries who cannot meet the targets that have been set.

It is interesting to note the words that the Council of Ministers delivered to explain why the new money had been forthcoming. They essentially pointed to the €78 billion debt as being "adequate", which is perhaps a little surprising given the seeming lack of any progress in paying it back!

They attributed this to a lack of tax revenue and so it is perhaps not surprising that in subsequent days the Portuguese Government have announced numerous new tax measures to increase their take from tax. These have included raising the amount of taxes on individuals in Portugal, as well as new measures to crack down on tax avoidance schemes.

Over the years this has been particularly prevalent with property deals on the Algarve which have frequently been carried out through offshore companies as a means to avoid paying tax on the money, and it is these schemes that the Portuguese Government are now cracking down on in the wake of the Council of Ministers meeting at the beginning of the month.

One of the other areas that the Council of Ministers pinpointed as being responsible for the shortfall in cash was an overspend on social security benefits as a result of higher unemployment in Portugal. The other side to higher unemployment is of course that tax revenues inevitably suffer, and so there is a kind of vicious circle effect going on.

You can't get tax revenues because not enough people are employed, but you can't help to get people employed unless you stimulate the economy and that requires an injection of capital into the economy.

The Council of Ministers felt that as long as the Portuguese Government were willing to negotiate with the local councils in Portugal to try to both increase tax revenues and restrict social benefits, that the financial situation could be helped and the targets they had proposed met.

It was in fact at this thirteen hour Council of Ministers meeting that the draft budget for the Portuguese economy for the next year was worked out, as any bailout cash is dependent on the government of that country meeting very specific fiscal targets. In order to do that it is necessary to work out a plan of action for the coming years that does not contravene the rules that have been set down for borrowing the money.

Accordingly, rough plans for the next two years were worked out and the bailout was approved on the basis of cuts to social security spending which in themselves led to protests on the streets of Portugal.

Later this was added to with proposed increases to the rate of taxation over the coming two years, which was an equally unpopular measure with Portuguese citizens, but which was a necessary condition for the other European Ministers to approve another bailout plan for Portugal.

The real worry is that Portugal is far from alone in having financial problems, with Greece, Cyprus and Spain also experiencing problems.

It remains to be seen how Portugal will weather the Eurozone crisis and if they will bounce back long term. 


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Published in: Business / Guide to Portugal / Money / News and Updates / Portugal Property / Portuguese Life