New York Times / International Herald Tribune

Portugal Follows Spain on Austerity Cuts

The center-left government of Mr. Sócrates, which has had to run the country with the tacit support of the opposition since losing its outright parliamentary majority last September, appears ill-placed to scrap Socialism-inspired rules that have strained the housing market but also help the elderly survive in Western Europe’s poorest country. After Britain, Portugal also has the region’s most unequal income distribution, with a minimum monthly salary of just €475, compared with €633 next door in Spain.

Even before the government announcement Thursday, Portugal’s economic woes had raised social tensions. This year, strikes against a freeze on public sector wages created transportation chaos and forced a temporary closure of schools and hospitals.
“Nobody has had the political courage to change something like these rental laws and I don’t see the situation changing in the short term, even if I don’t think the Portuguese tend to react as dramatically as the Greeks,” said Salvador Posser, who runs a family-owned company renting out construction equipment.
Besides distorting pricing in the housing market, the tenancy rules have left physical scars. Portugal’s historic city centers are dotted with abandoned and crumbling houses that are either subject to a court dispute or have rental income that cannot cover repair and maintenance costs.
“This economic crisis is clearly keeping our very slow courts even more occupied because of the amount of conflict that it is creating between landlords and tenants,” said Menezes Leitão, a law professor and president of PLA, a property owners association.
Mr. Posser cited a recent estimate that 8 percent of the buildings in central Lisbon were deserted, in large part because of rent-related obstacles. In Porto, the second-largest city, less than 10 percent of inner-city housing is available for rent, which has helped shrink the population by a third over three decades.
“We’re still losing about 30 inhabitants a day,” said Rui Moreira, president of the Porto Commercial Association.
Mr. Moreira, who has a real estate business, added: “We used to be among the biggest savers in Europe until the 1970s and the revolution, but then people here started borrowing, not so much because they wanted to travel or have a fancy car but because they had to buy a home instead of being able to pay rent.”
Portugal is not facing a property market collapse like that in Spain, where the construction boom added 2.8 million homes over five years, of which only 1.5 million were sold, according to research last month from Morgan Stanley.
But in terms of mismanaged public finances, Portugal has been closing the gap with the worst countries in the euro bloc, after its budget deficit rose to 9.4 percent of G.D.P. last year, from 2.8 percent in 2008. Ireland, Greece and Spain are cutting deficits that last year reached, respectively, 14.3 percent, 13.6 percent and 11.2 percent.
Portugal’s borrowing costs have soared, along with those of other weakened euro economies.
The country’s credit rating was downgraded two notches to A-minus recently by Standard & Poor’s, which said the structural weakness of Portugal’s finances and its uncompetitive economy justified a cut.
“The government now needs to make a big adjustment on public accounts,” said Vitor Bento, economics professor at the Catholic University in Lisbon. “By making that and contracting the primary deficit, this will also increase the savings ratio.”