Portugal OKs bills in austerity plan, bonds dumped

By Andrei Khalip

LISBON (BestGrowthStock) – Portugal on Friday passed two tax bills to cut the budget deficit and launched an early bond buyback to soothe investor fears of Greek debt contagion, but failed to stop bond spreads from hitting new euro era highs.

The measures came at the end of a week of surging worries about peripheral euro zone countries like Portugal and Spain, and even though they will not raise huge revenues, they showed that the opposition-dominated parliament can pass individual bills of the minority government’s austerity strategy.

The measures were passed with the support of ruling Socialists and the abstention of the main opposition party — the Social Democrats, which last week pledged to allow the passage of the plan and accelerate the austerity drive.

Parliament approved bills introducing a new 45 percent tax rate on incomes over 150,000 euros a year and a 20 percent capital gains tax on stock market profits.

The 45 percent rate will add just 30 million euros a year to state coffers but government officials have said it was important to tax the wealthy as the hard times require sacrifices from all Portuguese. The government has also proposed capping civil servants’ wages and trimming unemployment welfare.

“This is more than just symbolism, the measure seeks to reinforce the effort made by those with higher incomes in this crisis,” Tax Affairs Secretary Sergio Vasques told lawmakers, adding he was hopeful other measures would also be approved.

The bills are part of the government’s effort to slash the budget deficit to 2.8 percent of gross domestic product in 2013 from 9.4 percent in 2009 as it tries to reassure investors about its public finances.

Speaking in Paris, Prime Minister Jose Socrates said the government was ready to take all measures necessary to defend the economy, blaming speculative attacks for the rising spreads and financing costs, while reiterating that Portugal’s economic situation was very different from Greece.

TEMPORARY HELP

Separately on Friday, Portugal’s debt agency offered to buy back a week early, on May 12, the entire 4.628 billion euro amount of a bond maturing on May 20, sending a signal of its ability to pay back its debts to jittery European markets.

“It’s not a bad ploy, especially in a combination with a bond auction the same day, but the problem now seems to be not so much Portugal, but the whole weight of contagion, including in Spain,” Orlando Green, a debt strategist at Credit Agricole in London.

“Maybe it will help lower spreads temporarily, but the contagion is a much bigger problem,” he said.

The premium investors demand to hold Portuguese 10-year government bonds over safer German Bunds hit new euro lifetime highs of 374 basis on Friday, up from about 355 basis points late on Thursday.

Treasury Secretary Carlos Pina told parliament on Friday the “contagion from Greece is already affecting Portugal, Spain and Ireland.”

Many economists have said Portugal could be next in line to suffer after Greece even though it has much lower debt levels and the budget deficit, and has been buying back debt successfully to smooth out its redemption profile.

The bond to be repurchased next Wednesday is the only Portuguese treasury bond maturing this year. But the country will need to roll over maturing treasury bills regularly through the year. The bond was due to mature a day after a large Greek debt redemption of 8.5 billion euros.

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(Additional reporting by Axel Bugge and Sergio Goncalves; Editing by Toby Chopra)

Portugal OKs bills in austerity plan, bonds dumped