Page last updated at 11:12 GMT, Friday, 30 April 2010 12:12 UK

Portugal buffeted by Greek budget storm

By Alison Roberts
BBC News, Lisbon

Crowded train in Lisbon, 29 Apr 10
Trains are among the sectors hit by a wave of public sector strikes

Portugal is under pressure to convince investors that its public finances are under control - a tough job for the Socialist government after the country's credit rating was downgraded.

Prime Minister Jose Socrates has been briefing parliament on the government's austerity plans. He says Portugal is being targeted by "speculative attacks".

His room for manoeuvre may be limited as the markets probe eurozone weaknesses and many investors now see Portugal through a Greek prism. Portugal's growth depends largely on its trading partners.

Graph showing debt, deficit and debts insurance figures across 6 countries

This week the ratings agency Standard & Poor's lowered Portugal's credit rating two notches, sending yields on its euro-denominated bonds to record highs. So investors are demanding a higher price for lending to Portugal.

The People's Party, the smaller of two centre-right groups in parliament, also blames speculators but says the government failed to act decisively and thus left the economy vulnerable.

Party leader Paulo Portas warned of the impact as the cost of borrowing rises, "on a banking sector that will have difficulty financing itself, on companies that face losing access to some or all credit, on families that may see their mortgage payments increase in the medium term, and above all on economic confidence".

In 2009 Portugal's budget deficit reached 9.3% of gross domestic product and the public debt rose to 77% of GDP.

Grim outlook

Outside parliament, in the picturesque Sao Bento district, passers-by were clearly concerned.

PM Jose Socrates/photographers, 28 Apr 10
Media glare: Prime Minister Socrates is making some unpopular moves

"I am a Portuguese, I work and I am worried," said Sonia Chaves, 33.

"But I think most of the comments are speculation. We face a complicated situation but it's not as bad as they say it is. Do they live in Portugal? Do they pay taxes in Portugal? No."

Her friend, 46-year-old Ilda Pires, is one of hundreds of thousands of public sector workers who face a salary freeze for several years. While not relishing the prospect, she accepts that sacrifices are necessary.

"It feels very, very bad, but we need to help Portugal," she said. "I think it is necessary."

She agrees with the government that Portugal is not comparable to Greece, whose much larger debt mountain and wider budget deficit has forced it to ask for emergency funds. But like many here, she believes politicians are not coming clean to voters about the challenges Portugal faces.

"Some things are not clear," she said. "I think they are hiding some things, but I don't know what."

Trade union protests

Many Portuguese are not so willing to tighten their belts further, when banks continue to make large profits and top executives earn what seem to many to be fabulous salaries.

A Lisbon brokerage, 28 Apr 10
A credit downgrade means Portugal's borrowing costs have risen

Western Europe's poorest country, Portugal also has the most unequal income distribution after the UK.

On Thursday came the latest in a series of strikes by public sector workers: a stoppage by train drivers. It was timed to coincide with the morning rush hour and led to cancellations and disruption for commuters.

"Normally I agree with workers' right to protest, but we've had three days of this, and it's too much," said one bank worker who had come into Lisbon on what he described as an overcrowded and slow rail replacement bus.

Trade unions said further strikes were "almost certain". They are also gearing up for the usual mass demonstrations to mark May Day - a celebration of workers' rights.

But Greek-style violence is not foreseen in Portugal. Locals are fond of reminding outsiders that the 1974 coup that ended decades of dictatorship claimed just four lives - in contrast to events in Greece in the period.

Parties rally round

Martim Avillez Figueiredo, editor of a daily newspaper called i, accuses the government of failing to actively "sell" Portugal to investors.

"I think they've only really woken up to the problem in the past few days," he said.

He welcomed the united front presented this week by the prime minister and the recently-elected leader of the largest opposition party, the centre-right Social Democrats. They said they would work together to seek solutions that both parties could support.

The Socialists lost their outright majority in parliament last September, and normally need the support or at least abstention of the Social Democrats to get key bills through.

After the two leaders met on Wednesday, the government announced plans to bring forward some austerity measures already planned for next year, such as capping unemployment benefit and stepping up checks on welfare claimants.

But later the Socialists also restated their commitment to major public works projects such as a planned high-speed rail link to Madrid, which centre-right opposition parties say should be delayed.

Portugal's prospects, though, are likely to be determined as much if not more by events abroad.

As an international rescue package for Greece edged closer Portugal's stock market clawed back part of the week's losses, and the yields on government debt fell back from record highs.

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