Bail-out funds to be released to 'on track' Portugal
by Daniel Mason
Portugal is set to be granted access to the second installment of its multibillion euro bail-out after experts concluded that the government's austerity and reform programme was "on track".
Staff from the so-called troika – the European Commission, the European Central Bank and the International Monetary Fund – agreed to release the scheduled €11.5bn tranche of loans having carried out their first quarterly review of Portugal's progress.
Portugal negotiated a €78bn European Union and IMF rescue package earlier this year, becoming the third eurozone country after Greece and Ireland to require international assistance. The loans were conditional on Portugal implementing a series of austerity measures, and the IMF's head of mission Poul Thomsen said today that "Europe will do whatever it takes as long as Portugal perseveres with its reforms".
The troika said in a statement that the programme's success "more than ever hinges on the effort and the resolve of the Portuguese government and people". But it added that the decision by eurozone leaders on 21 July to lower the interest rates and extend the maturities on bail-out loans had provided a major boost.
Portugal's recovery is set to depend heavily on exports, while consumer confidence and employment have remained steady. Unemployment stands at just over 12 per cent. But gross domestic product is expected to contract by 2.2 per cent this year, with growth only returning in early 2013. Nevertheless, the troika remained confident that the deficit target of 5.9 per cent of GDP this year, down from 9.1 per cent, would be achieved. Banks have also strengthened their capital levels.
Formulating a budget that would cut the deficit further, to 4.5 per cent next year, would be one of Portugal's "key challenges". The centre-right coalition government, which won power in June, has said tax rises on electricity and natural gas would be implemented this year, and likewise a one-off levy on income is expected to raise €2bn. According to the troika, the "success of the programme hinges above all on the opening of the economy to competition" – and the government has made a "good start" in this area. Labour market reforms are also "advancing," the troika said.
With the troika concluding that the "programme is on track," the next loans will be made available in September, and a second review is due to take place in November. Portugal should be able to return to markets when the programme ends in 2013, without extra funding. But there was also a final warning from the troika: "While the reforms are generally off to a promising early start, most of the difficult challenges still lie ahead."