Embattled Portuguese PM vows to stick to austerity path

LISBON (AFP) - Portugal's embattled prime minister vowed on Monday to stick to reforms imposed by the bailed-out country's international creditors, in a bid to restore confidence after a political crisis sparked by the unpopular austerity measures.

"The confidence acquired during the last two years has been a bit weakened," Prime Minister Pedro Passos Coelho said in a speech.

But he promised to "rebuild this confidence by removing doubts on our willingness to finish our aid programme".

In exchange for 78 billion euros (S$130 billion) in rescue funds put up by the European Union and the International Monetary Fund, the country pledged to carry out sweeping reforms including massive job cuts in the civil service.

Portugal's doggedness in implementing the reforms has won it praise from its international creditors, and it has been hoping to exit the rescue programme when it ends in 2014.

But the measures have proved deeply unpopular at home, and disagreements over the spending cuts and tax increases were at the heart of a political crisis that erupted in early July after two key ministers resigned.

The turmoil pushed the country's borrowing rate above the critical 8 per cent, and sparked fears that Portugal would be forced to seek another bailout.

After three weeks of uncertainty, the ruling coalition gained a reprieve on Sunday as President Anibal Cavaco Silva, who has the power to call elections, said he backed the government and ruled out snap polls.

In reaction, investors eased pressure on Portugal, with yields on 10-year bonds falling to 6.537 per cent in late morning trade from 6.799 per cent at Friday's close. The Lisbon stock market was also up 2.46 per cent.

But the president's move was greeted by strong criticism at home, with leader of the opposition Socialists Alberto Martins complaining: "Everything remains as before even though the country needs a new course."

Daily newspaper Diario de Noticias said: "It is difficult to understand why Cavaco now accepts the solution which he had previously deemed insufficient."

The austerity measures are widely blamed for exacerbating a three-year recession, and the resulting hardship has sparked growing street protests.

The country forecasts a 2.3-per cent economic contraction this year, and has record unemployment of more than 18 per cent.

Nevertheless, Prime Minister Passos Coelho shrugged off his critics.

"There are many who say that the austerity is excessive, but it is what is required under the circumstances," he said, as he pledged to push on with the deep reforms.

Portugal was due to present a further 4.7 million euros in spending cuts to its international creditors during a review by auditors in mid-July. But that visit has been postponed to late August due to the political standoff.

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