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Portugal adopts austerity, says no bailout needed

By Barry Hatton

Associated Press

Published: Friday, Nov. 26 2010 7:40 a.m. MST

LISBON, Portugal — Portugal adopted a raft of debt-reducing austerity measures Friday, which the government claimed would be enough to restore market confidence in its public finances without resorting to a bailout.

Portugal's high debt and low growth have alarmed investors, fueling speculation it may be the next European country to need rescue after Greece and Ireland. Although it does not have a major debt sale until January, analysts say investors will not be reassured until its public finances are shored up by Europe's emergency fund.

Prime Minister Jose Socrates said in a brief statement after Parliament approved the government's 2011 spending plan that the country had "no alternative at all" to the belt-tightening policy.

"We must make this effort," Socrates said. He did not take questions.

Socrates said Portugal is on track to lower its budget deficit to 7.3 percent of gross domestic product this year. The deficit reached 9.3 percent last year — the fourth highest in the eurozone after Greece, Ireland and Spain.

That rise, accompanied by an economic recession, contributed to broader concerns about the financial soundness of the 16-nation eurozone.

The government has repeatedly said it does not want or need international financial assistance of the kind provided to Greece in May and currently being negotiated with Ireland.

To keep the rot from spreading to the much larger neighbor Spain, Europe's fourth-largest economy, some believe Portugal should take money earlier rather than later.

But Finance Minister Fernando Teixeira dos Santos has reiterated the government's stance while acknowledging that others in Europe didn't agree.

"There are those among our (European Union) partners who think the best way to ensure the euro's stability is to push and force those countries which are most in the spotlight to accept assistance," Teixeira dos Santos was quoted as saying in an interview with daily Jornal de Noticias.

Teixeira dos Santos did not specify whose views he was referring to. The European Commission, the European Central Bank and the German government all denied they were asking Portugal to take financial aid.

Even so, doubts about Portugal's strategy contributed to a rise in the yield on its 10-year bonds to a euro-era record of 7.045 percent Friday.

Teixeira dos Santos said he reckoned Portugal has six months to show markets it is able to bring its spending under control.

The austerity measures carried a political cost for the minority Socialist government which managed to pass the plan only after negotiating its content with the main opposition party. All other parties voted against it, saying it would worsen hardship in a country which is among the continent's poorest and where the average wage is around €800 a month.

Socrates, the prime minister, said the deficit this year would be lower than those of Britain, France and Spain. The targeted 4.6 percent deficit for 2011 would be below the EU average, he said.

However, investors are also concerned those targets may not be met and that the austerity measures will hurt already fragile growth. The Organization for Economic Cooperation and Development predicts the economy will contract 0.2 percent next year.

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David Rising in Berlin and Gabriele Steinhauser in Brussels contributed to this report.

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