Portugal strikes but tougher times may lie ahead

Portuguese workers have already staged one national strike in protest at the austerity measures put forward by the socialist government.

But if Portugal does indeed become the next European country to request a rescue package from the European Union, that protest could be just the start of the unrest.

The official line from prime minister Jose Socrates is that Portugal is not the next Ireland and it does not need any outside help to meet its debt commitments.

But bond markets, which have so far proved far more accurate indicators than comments from politicians, tell a different story.

The premium to insure Portugal's sovereign debt against default, or credit insurance/default swaps, recently hit a new high at over 500 basis points. That compares with Ireland at 580, Spain at about 300 and Greece at over 1,000.

A basis point on a credit-default swap contract costs €1,000 a year and protects €10m of debt from default for five years.

The difference, or spread, between the yield on Portuguese bonds versus German bonds has also hit record levels recently as Portuguese bond yields climbed above 7%.

It's reminiscent of the moves before Ireland finally accepted it needed more money. Portugal says it cannot be compared with Ireland because its banks are in much better shape, but here again there is plenty of room for debate.

Earlier this month, rating agency Fitch downgraded five leading Portuguese banks for a second time, causing fury in Lisbon and sparking Banco Espirito Santo, one of the five, immediately to cancel a contract with the agency because of its ‘unjustified’ action.

Like in Ireland, however, most Portuguese banks are now entirely dependent on funding from the European Central Bank, a factor in Fitch's decision to review its rating.

Portugal's big picture numbers also do not compare well. It will have a current account deficit of 10.3% of GDP this year, 8.8% in 2011, and 8.0% in 2012, according to the OECD, which puts it near top of the debt profiles across Europe.  The country's total debt level is also eye-wateringly high.

Jose Socrates' response has been to propose 5% cuts in the wage bill for public workers earning more than €1,500 a month, freeze public sector hiring and raise VAT to 23%. The measures are included in the government’s 2011 spending plan. It amounts to a fiscal tightening of 4% of GDP next year at a time when Portugal's economy is slowing fast.

But it is not all doom and gloom. Portugal does not have any major bond refinancings until next April, while it has not experienced a property bubble, unlike neighbour Spain and also Ireland.

“Portugal is going to have a 4.6% deficit next year, which is lower than Germany, lower than France, lower than Spain,” Angel Gurria, secretary general of the Organisation for Economic Cooperation and Development said in a recent interview with Bloomberg.

“Portugal has done its homework. Portugal has made its effort. They have addressed the issues and taken the bull by the horns,” he said.

EU officials are also supportive.  Portugal’s economic problems are “very different” than Ireland’s and the government has made “bold decisions” to cut the deficit, European Union Economic and Monetary Commissioner Olli Rehn said.

It could be enough to avoid the dreaded visit of the EU/IMF rescue team, but for a country that has averaged economic growth of less than 1% a year in the past decade, cutting debt other than through hefty cutbacks remains a significant hurdle.

The alternatives, if the current austerity measures don't work, look limited and with a workforce that has already started to take industrial action could be just too unpalatable for any government.