Portugal central bank chief urges consensus on budget

Portugal must quickly find a political consensus to support public sector cutbacks, central bank governor Carlos Costa said on Monday as the government battles to win opposition support for next year's budget.
A tough budget unveiled last week aims to save 5.1 bln euros next year in a bid to ease investors' nerves over Portugal's ability to finance itself at the highest relative borrowing costs since it joined the euro.
But the main opposition party refused to give its support to the draft in talks convened by Portugal's president last week.
"The extensive budget measures announced last week are an important step in turning the consolidation announced in May into a credible strategy," Costa, who also sits on the governing council of the European Central Bank, told a conference.
"But it is not enough. It is absolutely crucial to find a credible political consensus for the 2011 budget."
Costa, who was appointed head of the Bank of Portugal earlier this year when his predecessor Vitor Constancio was made vice-president of the ECB, also said it was not enough to focus just on budget consolidation in 2010 and 2011.
"The underlying problem persists — it is necessary to guarantee the solidity of public finances in order to give the state the capacity to react and handle macroeconomic risks and uncertainties created by external instability," he said.
The minority Socialist government announced a hike in value-added tax and a 5% cut in civil servant wages last week to be included in the 2011 budget. The government needs the support of the opposition to pass the budget in parliament.
Costa said Portuguese banks, and thereby the Portuguese economy, need "access to alternative sources of financing to be able to reduce their dependency on liquidity operations by the Eurosystem."
"This implies that the way the external perception of Portuguese sovereign risk develops will depend in a crucial way on the impact of the normalization of monetary policy in the Eurosystem," he said.
In August Portuguese banks borrowed a record 49 bln euros from the European Central Bank.
The government is aiming to cut its budget deficit to 7.3% of GDP this year from 9.3% in 2009. In 2011 the government is aiming for a budget deficit of 4.6%.