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As in Ireland, the worst may be yet to come

LIKE Ireland, the fiscal medicine that Portugal will be forced to swallow in exchange for an international bailout may be only the first taste of what is yet to come.

While the €78bn EU/IMF bailout announced on Tuesday allows more time than the Portuguese government had proposed to reduce its budget deficit, spending cuts threaten an economy that barely grew during the past decade.

Greece and Ireland may be forced to renegotiate the terms of their emergency loans from the EU and IMF.

"Like Greece and Ireland, we fear that there is too much cash on offer," said Ciaran O'Hagan, head of European interest-rate strategy at Societe Generale in Paris.

"Once again, we fear that the provision of aided loans will lead to less of a drive to cut spending and raise taxes."

The aid plan set goals for a budget deficit of 5.9pc of gross domestic product (GDP) this year, 4.5pc in 2012 and 3pc in 2013, according to the prime minister, Jose Socrates.

In March, the government had targeted a deficit of 4.6pc this year, 3pc in 2012 and 3pc in 2013.

The full terms of the package have not been released but the aid package will earmark €12bn for banks, an official from the Portuguese prime minister's office said.

The Lisbon government announced plans last year to sell €6bn of assets through 2013.

Portugal has raised taxes and is already implementing the deepest spending cuts in more than three decades to counter a debt load that is expected to reach 97.3pc of GDP this year. (Bloomberg)

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