Portugal starts labor reforms to get bailout funds

LISBON:Fitch Ratings has postponed its decision on Portuguese credit standing to the fourth quarter from the end of July, giving the new centre-right government more time to implement austerity under an EU/IMF bailout plan.

But it warned in a report on Thursday that the rating remains under pressure and failure to meet fiscal targets or a serious deterioration of economic performance from an expected contraction of 2 percent this year would weigh on its review.

It said there are "significant risks around the GDP forecast".

Fitch had previously said it would come to a decision on whether to downgrade Portugal by the end of this month.

Portugal "remains on Rating Watch Negative. Historically, most Fitch RWN have been resolved with a downgrade, but not always," Fitch analyst Douglas Renwick told Reuters when asked about the likelihood of a rating cut in the fourth quarter.

Earlier this month, ratings agency Moody's slashed Portugal's rating to junk status and said it might need a second bailout, causing its bond yields to blow out and triggering a wave of criticism in Europe for not giving the government time to implement the terms of the 78-billion-euro bailout.

The other two main agencies -- Fitch and S&P -- both rate Portugal at BBB-minus, at the very bottom of investment grade.

Fitch said its review will take into account a lower lending rate and longer maturities of bailout loans announced at last week's Eurogroup summit for Greece, Ireland and Portugal, as well as the first quarterly EU/IMF review of Portugal's performance under the bailout, due in mid-September.

Lisbon is committed to a strict calendar of measures subject to quarterly reviews by outside monitors. Bailout funds could be withheld if targets are not met.

Employers say the cut in compensation will help reduce unemployment, currently at a record 12.4 percent, by allowing companies to recruit workers without committing to potentially large future payouts.

"A company that needs, due to an increase in orders or to move into new markets ... to take on new staff, doesn't currently do it because the (financial) burden it takes on is so high that companies avoid hiring," Antonio Saraiva, president of the Confederation of Portuguese Industry, told AP.

But trade unions say it erodes workers' rights, and several hundred people staged a protest outside Parliament.

At the moment, staff are entitled to the equivalent of 30 days' pay for each year they have worked at a company. The government wants to cut that to 20 days and set a ceiling of 12 years.

The center-right coalition government has enough votes in Parliament to ensure its proposal would be approved.

Meanwhile, Finance Minister Vitor Gaspar said the government intends to slash state spending by 10 percent next year. The cuts will include a "drastic" reduction in the number of public bodies, he said.

Also, the government announced a progressive liberalization of the energy market with the removal of regulated tariffs from July 1 next year. That meets another stipulation of the bailout package.

Ratings agency Moody's earlier this month downgraded Portuguese bonds to junk status. Fitch, another ratings agency, said Thursday it will review Portugal's credit rating in October.

"The likelihood of further structural reforms under the EU-IMF program, combined with an improvement in Portugal's export structure over recent years, enhances the medium-term economic outlook for Portugal," Fitch said.

"Nevertheless, the burden of private sector and foreign indebtedness also weigh on the prospects for sustained economic recovery, essential for restoring confidence in the solvency of the Portuguese state," it said.

Portugal is in a recession that is forecast to continue through 2013.

Humphrey-Hawkins Meets the IMF

International Monetary Fund has issued a warning to France, telling the country that unless more spending cuts are implemented they will miss their plan to have the budget deficit 3% of output by 2013. reports the FT.

A new report from the IMF found that France's growth and tax revenues are unlikely to meet French expectations.

In order to make up the shortfall, the country should cut spending or face a downgrade, the fund recommended.

Just as the Humphrey-Hawkins legislation in the 1970s put a new burden on the U.S. Federal Reserve, that of seeking full employment, so did Madame Lagarde appear to add a mission for the IMF, which was founded after World War II to help manage international capital flows to ward off balance-of-payment crises.

Noting that joblessness and bleak career prospects for the young are a factor in not only unrest-gripped emerging nations but most developed countries as well, Lagarde told the Council on Foreign Relations that this issue is part of a “social instability” challenge to be met at the Fund. (It was one of three “challenges,” she said, the other two being sovereign debt and economic growth. Growth and social instability meet at the workplace. )

In an extension of that thought in her prepared text, not delivered, she also mentioned that “older generations are fighting to protect their health and pension benefits. Combine the two, and we may face a ‘clash of generations,’ to borrow a term coined by the scholar David Rothkopf.”

This area may come naturally to a woman who just spent four years as minister of economic affairs, finances and industry in France, a nation whose government actively tends to such things.

You might say, however, that Lagarde and the IMF will have their work cut out for them in tackling labor and benefits issues. As she herself acknowledged, her managing director post lacks direct international authority except when nations fall “under program” at the Fund, meaning that they require a workout to manage their monetary (and increasingly, economic) emergencies.

Perhaps in the gathering fiscal and financial storm, more sovereigns will yield to such suasion. (Some no doubt would like to see the politically-conflicted U.S. subjected to an IMF workout.) If Lagarde and her protean crew go on to tackle this nut on a global scale, we can hope that they show more skill in balancing financial stability with labor-force management than has the Humphrey-Hawkins Fed.

Applause for Lagarde's IMF debut

Emerging markets are increasingly losing faith in the International Monetary Fund due to its overtly European focus and questionable handling of the ongoing sovereign debt crisis, Ashmore’s head of research Jerome Booth has said.

Speaking to Citywire Global, Booth said that growing disillusionment among managers of emerging market funds was valid given the IMF’s recent activity.

Most notably, the IMF has agreed to pledge €78.5 billion to Greece, Ireland and Portugal through to 2014 and, earlier this month, it was also involved in thrashing out the €109 billion rescue package for Greece.

Although it has not stated how much it intends to contribute to the second Greek bailout.

Commenting on its involvement, Booth said: ‘The IMF risks its credibility by putting more money into Greece and arguably it should not have participated anyway in the existing bailout programme. The criticism is that it is now throwing good money after bad and I think that is an extremely valid concern.

Political nature of the current U.S. debt crisis may serve as a global economic harbinger.

“Given the current political situation within the U.S. with respect to spending cuts and tax rises, it would not be unreasonable to question future political appetite for future contributions to the IMF,” said Michael Hewson, market analyst with Britain’s CMC markets, in a report.

In Britain, there was consternation among some groups in June when they discovered the government had allowed a £9-billion ($13.9-billion) increase in IMF contributions. This may be a sign of fights to come, Mr. Hewson said.

He added that with these new fiscal realities and possible future contention, it’s necessary to reconsider the future of IMF funding, especially because its services will likely remain necessary in Europe for “quite some time to come.”

It could also lead to “a dilution of U.S. power and influence,” Mr. Hewson said.

Emerging market economies recently stood in opposition to the unwritten rule that European and U.S. governments choose the head of the IMF and World Bank, respectively. The recent appointment of Christine Lagarde as head of the IMF was approved with assurances that she would make the appointment more merit based.

According to Mr. Hewson, these same countries have demonstrated disquiet over the IMF’s special treatment of Europe’s debt crisis in contrast to how it has dealt with bailouts in the past. A political shift of this nature could make future bailout deals that much more onerous and conditional as the balance of power shifts to traditionally overlooked countries with the fiscal means to prop up the fund.