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Friday, July 29, 2011

Portugal starts labor reforms to get bailout funds

LISBON:Fitch Ratings has postponed its decision on Portuguese credit standing to the fourth quarter from the end of July, giving the new centre-right government more time to implement austerity under an EU/IMF bailout plan.

But it warned in a report on Thursday that the rating remains under pressure and failure to meet fiscal targets or a serious deterioration of economic performance from an expected contraction of 2 percent this year would weigh on its review.

It said there are "significant risks around the GDP forecast".

Fitch had previously said it would come to a decision on whether to downgrade Portugal by the end of this month.

Portugal "remains on Rating Watch Negative. Historically, most Fitch RWN have been resolved with a downgrade, but not always," Fitch analyst Douglas Renwick told Reuters when asked about the likelihood of a rating cut in the fourth quarter.

Earlier this month, ratings agency Moody's slashed Portugal's rating to junk status and said it might need a second bailout, causing its bond yields to blow out and triggering a wave of criticism in Europe for not giving the government time to implement the terms of the 78-billion-euro bailout.

The other two main agencies -- Fitch and S&P -- both rate Portugal at BBB-minus, at the very bottom of investment grade.

Fitch said its review will take into account a lower lending rate and longer maturities of bailout loans announced at last week's Eurogroup summit for Greece, Ireland and Portugal, as well as the first quarterly EU/IMF review of Portugal's performance under the bailout, due in mid-September.

Lisbon is committed to a strict calendar of measures subject to quarterly reviews by outside monitors. Bailout funds could be withheld if targets are not met.

Employers say the cut in compensation will help reduce unemployment, currently at a record 12.4 percent, by allowing companies to recruit workers without committing to potentially large future payouts.

"A company that needs, due to an increase in orders or to move into new markets ... to take on new staff, doesn't currently do it because the (financial) burden it takes on is so high that companies avoid hiring," Antonio Saraiva, president of the Confederation of Portuguese Industry, told AP.

But trade unions say it erodes workers' rights, and several hundred people staged a protest outside Parliament.

At the moment, staff are entitled to the equivalent of 30 days' pay for each year they have worked at a company. The government wants to cut that to 20 days and set a ceiling of 12 years.

The center-right coalition government has enough votes in Parliament to ensure its proposal would be approved.

Meanwhile, Finance Minister Vitor Gaspar said the government intends to slash state spending by 10 percent next year. The cuts will include a "drastic" reduction in the number of public bodies, he said.

Also, the government announced a progressive liberalization of the energy market with the removal of regulated tariffs from July 1 next year. That meets another stipulation of the bailout package.

Ratings agency Moody's earlier this month downgraded Portuguese bonds to junk status. Fitch, another ratings agency, said Thursday it will review Portugal's credit rating in October.

"The likelihood of further structural reforms under the EU-IMF program, combined with an improvement in Portugal's export structure over recent years, enhances the medium-term economic outlook for Portugal," Fitch said.

"Nevertheless, the burden of private sector and foreign indebtedness also weigh on the prospects for sustained economic recovery, essential for restoring confidence in the solvency of the Portuguese state," it said.

Portugal is in a recession that is forecast to continue through 2013.