Portugal launches tax hikes, enters bond market

Workers protest against austerity in front of the finance ministry after Portugal's Finance...
Workers protest against austerity in front of the finance ministry after Portugal's Finance Minister Vitor Gaspar's tax hike announcement during his news conference in Lisbon. REUTERS/Hugo Correia
Portugal has adopted sweeping tax hikes to meet budget goals under its international bailout, prompting unions to call a general strike against austerity measures that have exacerbated recession and are set to push record unemployment yet higher.

In a sign of progress in its long haul back to financial stability, Portugal earlier in the day returned to bond markets for the first time since it sought the 78 billion euro ($US101 billion) bailout last year, swapping short for longer-dated debt to buy time to fix its finances.

The country's worst recession since the 1970s could deepen if the tax hikes further undermine consumer confidence and fail to stop a fall in tax revenues.

"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.

The country's main union, the CGTP, responded with a call for a general strike on Nov. 14, dubbing the austerity measures "an authentic programme of aggression against the workers and the people". The CGTP already held a large protest march on Saturday.

"The consequences for the workers and their families are brutal - general impoverishment, drastic worsening of living conditions and life expectancy," it said in a statement.

Protests and strikes against cost-cutting have risen in recent weeks, with both railway and metro workers staging periodic walkouts all this week.

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 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 ... 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.

Portugal faces growing 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.

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.


But he said the sacrifices were not in vain, as the earlier-than-expected bond swap showed confidence in Portugal returning.

"It is not often that international investors show so much confidence in Portugal's adjustment as they did today," Gaspar said. "Portugal was to return to the market in 2013, it returned in 2012 ... It is an important mark."

Portugal sold 3.76 billion euros ($4.86 billion) of October 2015 bonds, exchanging them for debt maturing in September 2013. The swap to extend the debt maturity follows similar operations by fellow bailout recipient Ireland.

"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 country has still a long way to go before it can finance itself in the market, but buying up the September 2013 bond now, before it matures, will help its 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.

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 slightly lower on Wednesday at 8.76 percent.

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