Akhir 06 , 1432 H. / March 11, 2011 -- Portugal announced new spending cuts on Friday to try to restore confidence in its finances before a euro zone summit expected to boost economic coordination but defer steps to strengthen a rescue fund, according to Reuters. The euro, which suffered its biggest one-day fall against the dollar in a month on Thursday, hovered near a one-week low and the yields on Greek, Portuguese and Spanish bonds remained elevated amid growing doubts that leaders can bridge differences on how to solve the region's fiscal woes. The slow pace of European crisis management has heaped pressure on Portugal to seek an EU/IMF bailout, as Greece and Ireland were forced to do last year. But Prime Minister Jose Socrates has resisted saying it would be a national humiliation. In a last-ditch attempt to convince investors its finances are sustainable, the government announced new cuts worth 0.8 percent of gross domestic product this year and structural reforms that it said would push its deficit down faster. The measures include cuts in spending on social welfare and infrastructure. Changes to labour market rules are also planned, including a reduction in layoff payments. "As an additional precaution for 2011, the consolidation measures will be strengthened," Finance Minister Fernando Teixeira dos Santos told reporters in Lisbon. Germany has doused market expectations of a breakthrough on the rescue fund at Friday's summit of the 17-nation currency area, saying the most that should be expected is an agreement on a "competitiveness pact" it put forward with France last month. Bigger decisions to tackle the crisis -- such as whether and how to strengthen the euro zone's bailout fund -- will be handled at a later summit on March 24-25. "MAKE YOUR DECISION SOON" The announcement of new deficit-cutting measures had little impact on Portuguese bond prices, and Lisbon could face more pressure to seek a bailout at the summit. The FT Deutschland reported on Friday that the European Commission and the European Central Bank had discovered a "financing gap" in Portugal's budget plan. But the finance minister said there was no budget slippage and the measures taken were to ensure "there will be no doubts" about meeting this year's deficit target of 4.6 percent of GDP. European Monetary Affairs Commissioner Olli Rehn welcomed the "clear and important" Portuguese steps, which he said would help Lisbon regain control over its debt and end uncertainties. Austrian Finance Minister Josef Proell, in an interview with the Financial Times, urged Portugal to learn from the lessons of Greece and Ireland, saying "Don't be too late. Make your decision soon: yes or no." Germany's aim on Friday is to get euro zone states to enshrine EU rules on deficits and debt in national law -- effectively making it illegal for any euro zone member to exceed fixed deficit and debt limits in the future. The EU's Stability and Growth Pact sets a government deficit limit of 3 percent of GDP and debt of 60 percent of GDP. Translating that into national laws would entail the adoption of a "debt brake", similar to what German law requires. "Euro area member states commit to translating EU fiscal rules as set out in the Stability and Growth Pact into national legislation," the latest draft of the agreement reads. Euro zone leaders are expected to sign up to it on Friday. "Member states will retain the choice of the specific national legal vehicle to be used, but will make sure that it has a sufficiently strong binding and durable nature (e.g. constitution or framework law)," the draft said. If Germany and France can get the remaining euro zone members to sign up to the competitiveness pact -- which also includes moves to gradually raise retirement ages and work towards a common corporate tax base -- there is an expectation that Germany will agree to back a stronger bailout fund. RESCUE FUND The European Financial Stability Facility, used to rescue Ireland, has an effective lending capacity of 250 billion euros ($345 billion), not its full 440 billion, because of guarantees needed to retain its triple-A credit rating. Increasing the capacity will require German backing and all member states to increase their contributions or guarantees, not a straightforward task given popular opposition to bail outs. That debate will be taken up on March 24, but its outcome may depend on how much backing Germany gets on Friday. While euro zone leaders will hail any agreement on competitiveness as a big step in tackling the debt crisis, analysts regard it as a sideline issue, saying it goes nowhere towards tackling the fundamental problem of bad banking debts and highly indebted sovereigns with poor growth prospects.
