Finance minister Fernando Texeira dos Santos said failure to agree on budget cuts will 'plunge the country into a very deep financial crisis' Photo: AP Hopes of a budget deal in Portugal collapsed after marathon talks between the minority government of socialist premier Jose Socrates and conservative leaders ended in acrimony.
Finance minister Fernando Texeira dos Santos said failure to agree on budget cuts will "plunge the country into a very deep financial crisis".
Meanwhile, Ireland has announced fiscal retrenchement of €15bn over the next four years, twice the original plan. It is already cutting public wages by 13pc.
John Fitzgerald from Ireland’s Economic and Social Research Institute said there is a risk that austerity tips the economy into a downward spiral, comparing it to an overdose of "chemotherapy" that does more harm than good.
Finance minister Brian Lenihan said the country had no choice. "The cost of borrowing is high and rising, and if we do not act soon to live within our means, people may stop lending to us. We will not fool the markets for an instant if we seek to defer any longer what evidently needs to be done now. The Irish people will have to accept cuts in public expenditures and higher taxes," he said.
In Greece, yields on 10-year bonds surged 67 points to 10.26pc, the biggest jump since the turmoil in June. The sell-off came after permier George Papandreou warned that the country was still in danger, and threatened to call early elections.
Finance minister George Papaconstaninou refused to rule out a request for an extension of the repayment period for the EU rescue package and confirmed that tax revenues are falling short. "We are deluding ourselves as a country in thinking we have a tax system. We don’t," he said.
He confirmed leaks that the budget deficit for 2009 would be "above 15pc" of GDP, higher than the last estimate of 13.8pc and five time the original claim of 3pc by the previous government.
Gavan Nolan from Markit said fears of "political instability in sovereign credits" had moved onto the radar screen, with investors now paying closer attention to whether or not governments can actually deliver on austerity plans.
It unclear whether Portugal can salvage anything over coming days in what amounts to a game of brinkmanship, with the socialists demanding VAT tax rises and the conservatives demanding spending cuts.
The opposition denied that there was "any possibility" of continuing talks, but hinted that it would abstain on the budget vote. Mr Socrates in turn has said he will resign if there is no accord.
Julian Callow from Barclays Capital said politics is intruding in the eurozone fiscal crisis. "It is one thing to promise cuts but it is very different to agree on details and decide where the axe will fall. There are some encouraging signs but Portugal has an awesome undertaking ahead in squeezing fiscal policy by 4pc of GDP over the next year, and the the task may be too great."
Yields on 10-bonds jumped 25 basis points on Wednesday to 5.77pc, far above the likely rate available from the EU’s bail-out fund and the International Monatery Fund. A string of top economists in Portugual have said the country should call in the IMF to gain breathing time.
As members of the eurozone, Portugal, Ireland, Greece cannot devalue or resort to monetary stimulus offset fiscal tightening. They must each pursue a policy of "internal devaluation", meaning deflation within the currency bloc to regain lost competitiveness.
This is risky for economies with total debt levels above 300pc of GDP, as is the case in Ireland and Portugal. Ireland’s nominal GDP has already contracted by over 20pc of GDP, yet the debt burden has not diminished.
The test will be whether these countries can generate enough exports to trade their way out of crisis over coming years, or remain trapped in slump with rising political tensions.
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