Portugal got a €78bn bail-out this spring and was supposed to cut its budget deficit to 5.9% this year. With the deficit at 8.4% in the first half, this always looked unlikely. So this week further austerity measures were announced. These include eliminating bonuses equivalent to two months salary in 2012 and 2013 for public-sector workers and retirees earning more than €1,000 a month.
Further austerity is likely to deepen the recession, with the government expecting a cumulative 5% fall in GDP this year and next. Public debt is expected to stabilise at 113% of GDP in two years. The wider danger is that Portugal, like Greece, is falling into a debt trap – a shrinking economy lowers tax revenues, causing more austerity and further damaging growth. Social unrest is also mounting. The global slowdown and Portugal’s uncompetitive exports will make it hard to escape default, says Charlie Fell in The Irish Times. Portugal looks “insolvent” and is likely to have to leave the eurozone eventually.