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Budget will increase bad loans, warns Bank of Portugal

bankofportugal2A report from the Bank of Portugal shows that the further cuts envisaged in the 2014 State Budget may well have 'negative consequences' for the banking system.

Published on Tuesday, the Bank’s Financial Stability Report outlines some risks that the new budget may bring to the national financial system, primarily an increase in bad loans.

In a conclusion that did not stretch economic theory too far, the bank respectfully suggested that cuts in wages and pensions will have repercussions; "These developments may have a negative impact on domestic demand and thus hinder the recovery of employment, with many families therefore unable to maintain their credit committments.”

In simple terms, with more people unemployed, and those employed becoming ever poorer due to the level of taxation, many more will be unable to pay their bank loans and mortgages and will go into default.

The Communists worried about the already low paid population, which after the State Budget 2014 was approved in Parliament today, would get poorer with the planned cuts above €600 pcm in wages "clearly confronting the limits set by the constitution” in reference to the doubts about the constitutionality of this particular statute.

The Greens asked Cavaco Silva to run the whole budget past the Constitutional Court, "we appeal directly to the President of the Republic to request the assessment of the constitutionality of this Budget by the Constitutional Court."

 On a more upbeat, albeit 'party line' note, the dutiful Secretary of State for the Prime Minister’s office referred to exports as an example of the recovery of the Portuguese economy and said that Portugal will not need a second bailout.

This was largely in response to an article published by the Financial Times last Friday that questioned whether Portugal would need a second adjustment programme. The article raised doubts about the success of the current adjustment programme and on the ability of the country to return to the international markets at its own pace next June.

Carlos Moedas rejected the FT’s assertions and conclusions saying that since 'the reforms' the Portuguese economy is more "sustainable and efficient” and that Portugal does not need another bailout programme at all.

Moedas blamed the world for its failure to understand the "transformation" and "economic modernisation" of Portugal, also the work done to underpin the country’s finances and the ability of Portugal now to "attract investment" to "stimulate sustainable growth."

Moedas pointed to the positive current account balance, made so by the "excellent performance" of the export sector, failing to notice that this was as much due to the collapse in domestic demand for imported goods and services.

In addition to the reforms in the economy, which "makes it easier to start a business," Moedas pointing to "governmental stability" as a prime condition to fulfill the programme agreed with the Troika.

The government has its way with the 2014 budget but the acid test is when the Troika leaves town and Portugal attempts to go it alone, raising money from the international markets to operate a still swollen state sector.

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