Portugal constitution may need changes to keep bailout on track
LISBON, Aug 30 (Reuters) - The third rejection of government austerity plans by Portugal's constitutional court in 13 months has raised doubts about whether any serious structural spending cuts sought by EU/IMF lenders can be done without constitutional changes.
While short of sparking an immediate crisis, the latest failure to push through deficit-cutting measures is at minimum a setback. It is one that could complicate the upcoming review of Lisbon's bailout by its European Union and International Monetary Fund lenders next month.
But the continued objection of the constitutional judges suggests more radical action may be needed.
"We can't live in this constant uncertainty. Without constitutional changes the measures now sought by the troika of lenders are hardly possible to enact," said Adelino Maltez, a political scientist at Lisbon's Technical University.
Amending the constitution would require the consent of the main opposition Socialists as the government's parliamentary majority is not big enough. Analysts says that despite the political divisions, such consent is not impossible to get - but could take time.
Portugal's current bailout programme ends in mid-2014, but many analysts expect the indebted euro zone country to need some sort of a further support programme.
Lisbon does not want a second bailout. But the court's ruling on Thursday against a bill that would have effectively allowed the state to fire public sector workers after a requalification period does not bode well.
"There could be some room to reshape the rejected proposal, but if it grows into a more complicated issue requiring constitutional changes, which is possible, that would make a second bailout programme more likely ... by delaying the spending cuts," said Giada Giani, a Citi economist in London.
Portuguese bond yields jumped on Friday, but were well below the highs seen in July when a now-healed government rift threatened to derail the bailout altogether.
The parliament-approved bill rejected by the court contained a relatively low estimated net worth of 170 million euros in spending cuts next year. But it was an important element of the 4.7 billion euro overall spending reform because of its potential longer-term structural effect.
The court's president, Joaquim Sousa Ribeiro, left the door open to reshaping the bill, saying the court rejected only a technical part of the scheme.
Prime Minister Pedro Passos Coelho vowed that "we will manage to overcome the difficulties" faced by the cost-cutting drive, reiterating that the country needs to meet the terms of the bailout and avoid a second rescue programme.
He said it was premature to speak of any alternative measures as the government will study the court's objections to try and correct the unconstitutionality of the bill.
But analysts say the court ejections reveal miscalculations by the centre-right government, which now needs to forge consensus with the Socialists.
"The government has been telling the lenders there are no obstacles to its plans, but there are constitutional principles that made this rejection easily foreseeable," Maltez, the political scientist, said.
In his view, the opposition Socialists, at heart, want a leaner state and their loud opposition to government plans ahead of the Sept. 29 local elections is not insurmountable if conservative President Anibal Cavaco Silva actively mediates.
In July, Cavaco Silva made a strong appeal for the parties to come to agreement, but talks flopped after a few days.
Citi's Giani also said Cavaco Silva's July attempt suggested there could be more efforts to forge consensus around the reforms.
Indeed, the idea appears to be alive and well despite last month's flop.
A few hours before Thursday's court ruling, former premier Pedro Santana Lopes of the ruling Social Democrats said "a constitutional revision could help to seat the main parties at the table and tackle the country's main problems."