Portugal reels as labour reform struck down

Bailed-out Portugal struggled on Friday with a fresh setback to its austerity drive after the Consitutional Court struck down a reform allowing civil servants to be laid off if they fail to requalify for a new job.

Financial markets punished Lisbon after the decision, sending the yield on Portuguese government 10-year bonds spiralling to 6.785 percent in morning trade from 6.574 percent at Thursday's close.

It was the latest in a series of blows to Lisbon's efforts to fix its finances as a condition of a 78-billion-euro ($104 million) bailout by the International Monetary Fund and European Union in May 2011.

The Constitutional Court had already rejected in April some tight-fisted provisions of Prime Minister Pedro Passos Coelho's 2013 budget, including cuts to state workers' salaries and to unemployment and sickness benefits.

In its latest decision Thursday, the Constitutional Court reversed the government's plan to cut 30,000 of the country's 500,000 public jobs so as to save 4.7 billion euros by the end of the year.

The court objected to a provision that it said flouted Portugal's "job safety guarantee" because it enabled civil servants to be laid off if they failed to find a new job by the end of a one-year requalifying period at a discounted salary.

"The decision is a setback on the path that ... the Portuguese government must take to rationalise and modernise public administration," said Marco Antonio Costa, vice president of the prime minister's centre-right Social Democratic Party.

The left-wing opposition and unions hailed the court ruling, however.

The opposition Socialist Party "rejoices", said Joao Proenza, a member of the party's national secretariat.

"This decision is important. It confirms that the government is illegitimate and outside the law," said Communist Party chief Jeronimo de Sousa.

The court ruling came at a delicate time for the government just ahead of a mid-September visit by officials of the troika of Portugal's bailout creditors: the European Union, European Central Bank and International Monetary Fund.

The troika is expected to review Portugal's progress in fixing its finances before the bailout-out programme ends in June next year.

Lisbon had earlier postponed the troika's visit because of a three-week political crisis in July sparked by the resignation of two ministers from the ruling coalition over disagreements about the austerity programme.

The troika has already twice relaxed Portugal's deficit-cutting targets. The government is now committed to slashing the public deficit from the equivalent of 6.4 percent of gross domestic product at the end of 2012 to 5.5 percent in 2013 and 4.0 percent next year.

Already, speculation is growing that the government may ask for the targets to be relaxed for a third time.

The Portuguese government says the Constitutional Court's earlier decision in April to reverse part of its 2013 budget cost it 1.3 billion euros in potential savings and forced it to present a plan to cut state spending by 4.7 billion euros up to the end of 2014.

Rebuffed by the court again four months later, the government's credibility is now at risk, said an editorial in the business daily Jornal de Noticias.

"One has the impression that the Court is a blocking force that is preventing the state from becoming solvent and having balanced accounts," the paper said.

Portugal's government can nevertheless take comfort from less sickly economic figures. After two and a half years of recession, the economy posted growth of 1.1 percent in the second quarter and the unemployment rate dipped to 16.4 percent from 17.7 percent in the previous quarter.

Market Data

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    AUDEUR=X
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