In the spring of 2011, Portugal reached an agreement with the ECB, EU and IMF on a €78bn financial rescue package. Under this plan, the Portuguese government was committed to reducing its budget deficit to less than 3.5% of GDP by 2013 (later softened to 5.5% of GDP). However, on April 5, 2013, Portugal’s constitutional court rejected four out of nine contested austerity measures from the budget. Portugal now finds itself caught between widespread political and popular dissent and the need to retrench further in order to meet troika requirements. In response to the judgement, Christian Lenk and Daniel Lenz of DZ Bank analyse austerity efforts as well as developments in government bond issuance. They conclude that despite short-term political risks, there are unlikely to be major obstacles to a Portuguese bailout. They also suggest that the troika will endeavour to shore up the Portuguese government, given its consistent efforts in maintaining the austerity programme.
This article was featured in a recent issue of Current Economics. You can download a sample at www.consensuseconomics.com.