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Portugal adds tax pain to meet targets

Thursday, October 04 07:32:42

Portugal adopted sweeping tax hikes on Wednesday to meet budget goals set as conditions for its international bailout, hoping to stem falling revenues due to a recession that is set to push unemployment to further record highs. Earlier in the day Portugal also returned to bond markets for the first time since it sought the 78 billion euro ($101 billion) bailout last year, swapping short for longer-dated debt to buy time to fix its public finances.

The country's worst recession since the 1970s could deepen if the tax hikes further undermine consumer confidence. There is also a danger that raising taxes could spark more opposition to austerity measures that have already included salary cuts and spending cuts. "We are confronting a critical moment," Finance Minister Vitor Gaspar told journalists as he detailed the tax rises, which the government came up with after it abandoned a previous tax plan in the face of mass protests.

"It is fundamental that we maintain our current path to overcome our difficulties," said the minister. Gaspar outlined tax rises across the board for 2013, including income and property taxes, plus a new tax on financial transactions. The average income tax rate will rise to 11.8 percent from 9.8 percent currently and an additional 4 percent tax surcharge will be levied on incomes in 2013. The government said the measures, which will also include spending cuts, will amount to 3 percent of gross domestic product next year, and raised its estimate for unemployment to 16.4 percent from its current record level of 15 percent.

"These are tough measures, probably worse for the public sector than the private, and protests will probably go on, but I don't think there will be any backing off by the government this time," said Antonio Costa Pinto, political scientist at the University of Lisbon. Gaspar maintained the government's forecast of a 3 percent slump in gross domestic product this year and a decline of 1 percent in 2013. Investors welcomed the country's first venture into the bond market since last year's bailout, easing Portugal's debt repayments next year. The IGCP debt agency sold 3.76 billion euros ($4.86 billion) of October 2015 bonds, exchanging them for debt maturing in September 2013. "The size of the swap is very decent, and I guess it goes some way in reflecting that there are investors out there who have confidence in Portugal's and the euro zone's outlook," said Orlando Green, debt strategist at Credit Agricole in London.

The swap to extend the debt maturity follows similar operations by fellow bailout recipient Ireland. The head of the IGCP debt agency, Joao Moreira Rato, said "this marks a first step for Portugal to regain access to medium- and long-term debt markets". Under Portugal's bailout, the country was expected only to return to finance itself in bond markets in the second half of 2013. Buying up the September 2013 bond now, before it matures, will help the country's financing needs next year. The amount it swapped represented 39 percent of the outstanding amount of the September maturity - the first not fully covered by the bailout.

Still, Portugal faces growing economic challenges as the previous political consensus behind the austerity programme was dented last month by the country's largest protest since the bailout following a government plan to raise social security taxes. The government abandoned the plan after the protests and announced Wednesday's tax hikes as an alternative. The European Commission has already approved the new measures, it said on Monday. Strikes against cost-cutting have risen in recent weeks, with both railway and metro workers staging periodic walkouts all this week.

Portugal's largest union, the CGTP, is set to announce later on Wednesday whether to launch a general strike soon, after it held a large protest march on Saturday. But bond investors appeared not to be overly worried about growing social strife. "The recent political and social tension didn't have an impact, nor am I certain it had any relevance for this operation," said Filipe Silva, debt manager at Banco Carregosa in Porto. While still high, Portugal's bond yields have fallen sharply this year, helped by the European Central Bank's plans to help hold down the borrowing costs of countries that have signed up to budget overhauls. Benchmark yields have fallen to around 9 percent from highs near 17 percent in January. Ten-year yields were virtually unchanged on Wednesday at 8.76 percent. ( C) Reuters