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Portugal move to follow Irish exit

Wednesday, December 04 15:58:57

Portugal's international lenders began their 10th review of its economic progress today, as Lisbon took more steps towards exiting its bailout programme in 2014 with a bond swap and the privatisation of its postal service.

Still, questions about Lisbon's ability to deliver tough budget cuts in 2014 will be high on the agenda during the review, because the country's Constitutional Court could challenge civil service pension and wage cuts included in next year's budget.

"This review should above all be about a possible plan B in case of challenges by the Constitutional Court," said Filipe Garcia, head of the Informacao de Mercados Financeiros consultants.

The court has already rejected a series of austerity measures, and a key element of the spending cuts next year - reductions in public sector workers' pensions - have been sent to the court. Civil servants' wage cuts are also set to be challenged.

"If it wasn't for the Constitutional Court and the law on pensions (Prime Minister Pedro) Passos Coelho could say that this year Christmas has arrived early," the director of business daily Antonio Costa wrote in a column on Wednesday.

Premier Passos Coelho hopes that the economy's gradual crawl out of recession after its worst downturn since the 1970s will enable Portugal to exit its bailout as planned in mid-2014. The bailout has imposed harsh spending cuts and massive tax hikes on the Portuguese since 2011.

The officials from the 'troika' of international lenders - the European Commission, the European Central Bank and the IMF - will monitor Portugal's adherence to reforms and budget cuts under its bailout. Such inspections usually last 10 to 15 days.

It is the third-to-last review before Portugal is due to exit the lending programme.

Lisbon boosted its chances of exiting the bailout on Tuesday when it swapped a larger-than-expected 6.6 billion euros of bonds maturing in the next two years for longer-dated paper, alleviating its short-term repayment costs. That could ease its path to issuing new bonds early in 2014, bringing it a step closer to returning to market financing.

Portugal also set the price for this week's privatisation of the CTT postal service on Tuesday, meaning it will raise about 580 million euros and further exceed its target for privatisations as set out under the bailout.

The troika will welcome those developments. But it will still be wary of the challenges ahead for Portugal, after warning during its review in October that the Constitutional Court was the biggest threat for the government.

The measures that face legal challenges are worth more than 1 billion euros. If the challenges are upheld they could upset the country's goal of cutting its budget deficit to 4 percent of gross domestic product next year from 5.5 percent this year. (Reuters)