LISBON, Nov. 30 (Reuters) - Portuguese unions backed away from confrontation with the government on Tuesday over austerity plans it sees as vital to avoiding an international bailout. Union leaders said they wanted to talk to Prime Minister Jose Socrates over their worries rather than take to the streets. A general strike last week paralysed public transport and shut down many services.
Their words were a glimmer of good news for Socrates, who says the austerity measures can succeed in pulling Portugal out of its debt crisis even though many economists and investors believe a bailout is inevitable.
Earlier on Tuesday, the central bank said the country’s banks faced an "intolerable risk" unless the government manages to bring its public spending under control. Socrates is under intense pressure from investors to show Portugal can avoid the fate of Greece and Ireland and become the latest euro zone domino to fall. Last week he pushed through a harsh budget which will raise taxes and cut public sector wages.
Ireland received an 85 billion euro ($113 billion) bailout package from the EU and IMF this weekend. Economists fear that unless Portugal takes the same medicine, the contagion will spread to its neighbour Spain, a considerably larger economy.
Portugal’s risk premium, measured by the spread on its 10-year government bonds over safer German Bunds, was down six points from Monday at 450 basis points.
Banking shares led Portuguese stocks lower, with Banco Espirito Santo slumping 2.8 percent and Millennium BCP down 1.5 percent at close on Tuesday.
On Wednesday, all eyes will focus on a treasury bill auction. Portugal will issue 500 million euros of 12-month bills and if the borrowing costs are high, it would be a further blow.
"The market is pushing rates higher to a level where countries are being obliged to ask for help," Filipe Garcia, an economist at Informacao de Mercados Financeiros consultants, told Reuters.
"This is not really in our hands any more," he said, adding that the timing of any bailout was very hard to predict.
DON’T KILL PATIENT WITH CURE
Pedro Roque, Deputy General Secretary of the 500,000-strong Workers’ General Union (UGT), said it would take a path of negotiation rather than confrontation over austerity measures, indicating Portugal might avoid violent unrest.
"We’ve shown that we are unanimously against such measures, but now we want to be part of the negotiations and discussions so that any new potential package of measures is not harmful, so that it does not kill the patient with the cure," he told Reuters in an interview.
CGTP Manuel Carvalho da Silva told reporters his 750,000-member union was also ready to negotiate to reach a compromise, although the government must change its course.
"There is only one way to respond to the markets’ blackmail — finding a policy that generates growth," he said.
The government expects the economy to grow at least 1.3 percent this year mainly thanks to growing exports, after last year’s 2.6 percent contraction. But next year it predicts an expansion of just 0.2 percent and many economists say the economy will slide back into a recession.
The Bank of Portugal financial stability report said failure to consolidate public finances endangered the banking sector.
"The risk will become intolerable if we do not see the implementation of measures that consolidate public finances in a credible and sustainable way," it said.
Budget execution has been poor so far this year and Brussels is pushing Socrates to do more.
The government has promised to cut next year’s budget deficit to 4.6 percent of gross domestic product from 7.3 percent this year, with across-the-board tax hikes and five percent cuts in civil servants’ wages.
Despite the pressure, analysts say Socrates’ minority Socialist government will hang on for the first few months of next year. Because there is a presidential election in January, the constitution stipulates that a snap election cannot be held before May at the earliest.
Social Democrat leader Pedro Passos Coelho has gained a strong lead in opinion polls as the crisis has deepened. But he appears to be biding his time, knowing the government’s popularity will fall further if a bailout comes.
