The discussions continue in Brussels to twist Portugal into compliance with required Stability Pact norms by kicking the 2016 State Budget around until it fits.
Brussels will decide on Friday whether the efforts of the eurocrats and Portugal’s team from the Finance Ministry are worthy of approval.
The government believes it is "very close" to a positive outcome but there remains political division within the European Commission as the two commissioners responsible for all things financial can’t agree whether Portugal’s budget is OK yet, or not.
The final and solemn decision of the European Commission will be released after a key meeting of the College of Commissioners, but the Portuguese Government says the game is over as far as it is concerned and that all will be well, plain sailing, blue horizons while fingers remain crossed.
The government has managed to get the green light from the European Commission technical team but this is not enough as Commissioner Pierre Moscovici needs to give the re-budget the nod, and then the College of Commissioners has to approve.
The problem has been that António Costa’s 2016 State Budget contained some rather optimistic projections which were necessary to boost government revenue and spur economic growth so as to cover the tax cuts and pension increases that formed part of his election manifesto.
Brussels spotted this ruse early on and has been putting pressure on the Portuguese team to raise other taxes, such as on fuels.
The Brussels proposal will mean an extra 6 or 7 cents per litre of fuel, an easy one to slip through with the oil price on its knees and diesel and petrol correspondingly low.
Another tax rise will be on vehicles with the government and Brussels using the 'environment' as an excuse to disguise the real reason for hikes.
Tax rates on tobacco were due to rise anyway in the 2016 Budget but will go up further, thus encouraging smuggling to eat into extra tax revenue.
There are more tweaks, some more painful than others and some overdue such as scrapping the exemption of IMI for real estate investment funds.
The package agreed with Brussels has one nasty side-effect as these extra tax rises will have a negative impact on Gross Domestic Product which ‘post-Brussels’ will grow 1.9% rather than the government’s prediction of 2.1%.
Friday should see an announcement. The government needs this Budget to go through to raise the chances of positive ratings agency reports.
This will enable government bond sales to proceed without being subject to high interest rates as have been seen in the past.
Canada's DBRS is the only credit rating agency which lists Portugal’s bonds as ‘investment level,’ one level above ‘junk’ status so if the rating drops, bonds issued by Portugal will not be accepted as collateral by the European Central Bank for its loans to Portugal’s banks
This means that if the rating was cut, Portugal could be pushed into a new bailout as under European rules the ECB's collateral rules will have been breached. Hence, Friday is an important day.
