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Crisis-hit Portugal launches more labor reforms

By Barry Hatton

Associated Press

Published: Wednesday, Dec. 15 2010 10:27 a.m. MST

LISBON, Portugal — Portugal's government unveiled new fiscal measures and proposed labor market reforms Wednesday in its latest attempt to ease a financial crisis that has contributed to the market turmoil destabilizing the wider euro zone.

The proposals included placing new limits on compensation payable to workers who lose their job and allowing temporary reductions in working hours at companies in difficulty.

The measures, which seek to facilitate company restructuring, will be presented to trade unions and business leaders for negotiation, Labor Minister Helena Andre said.

Meanwhile, the Finance Ministry will set up teams to monitor whether the government is abiding by its quarterly spending targets as part of the country's effort to reduce its high debt load.

The planned labor reforms are part of an effort to make Portugal's feeble economy more competitive — a key demand by German Chancellor Angela Merkel and other European leaders who are reluctant to keep providing financial help to ailing nations on the bloc's fringe, including Portugal.

Portugal's high debt and low growth have made it one of the frailest members of the 16-nation euro zone. But the government insists it doesn't need or want a financial rescue of the kind provided to Greece and Ireland, even though its borrowing costs have soared.

Economy Minister Jose Vieira da Silva said the government would provide more credit and tax breaks for companies exporting to non-EU countries and set up fast-track bureaucratic procedures for exporters.

Meanwhile, companies identified as being leaders of innovation will be given tax exemptions, he said.

Finance Minister Fernando Teixeira dos Santos has set a budget deficit target of 4.6 percent of gross domestic product next year following a previously announced austerity program that triggers sharp reductions in state expenditure as well as tax hikes and public sector wage cuts.

Last year's budget deficit of 9.6 percent was far below Greece's 15.4 percent but was still the fourth-highest in the euro zone and spooked investors worried about the bloc's fiscal health. The government says Portugal's deficit will fall to 7.3 percent this year.

The Finance Ministry monitoring teams will be given additional powers and resources to oversee expenditure and demand corrections in spending.

"It will be a tough system which ensures corrections are made promptly," Teixeira dos Santos said.

He also announced a crackdown on tax evasion. A recent Portuguese university study calculated that the shadow economy last year represented around €40 billion — roughly one-fourth of annual GDP.

The country has experienced no difficulty financing itself this year on international markets, but the rising rates demanded by investors to risk lending money to Portugal could become unsustainable, as happened with Greece and Ireland.

A three-month Treasury bill sale Wednesday underscored Portugal's deepening problem. The auction raised €500 million ($668 million), but the average interest rate of 3.4 percent was almost double the rate of 1.8 percent only last month.

The government debt agency said there was market demand for almost double the amount on offer.

The yield on Portuguese 10-year bonds, meanwhile, rose for the eighth straight session, reaching 6.4 percent. By comparison, benchmark German bonds stood at 3 percent.

As well as cutting Portugal's high debt load debt, authorities are trying to reassure markets that the austerity program won't choke the growth needed to generate wealth and help pay off debt.

The International Monetary Fund predicts the Portuguese economy will contract next year by 1.5 percent. The European Commission forecasts it will shrink 1 percent.

However, the government says its policies are already bearing fruit. Portugal recorded growth of 1.8 percent in the first nine months of this year, and exports rose more than 15 percent.

But unemployment has risen to a two-decade high of 11 percent and brought a further drain on state funds as welfare payments have increased.

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