Portuguese bailout record gets cautious EU praise

Wed, Apr 4, 2012, 01:00

THE EUROPEAN Commission has warned of “important risks and challenges” to the Portuguese bailout but said the rescue remains on track, with no need for a revision.

Although Portugal’s notional borrowing costs remain very high, the commission said the current EU-International Monetary Fund programme for the country should be enough to ensure it regains access to private debt markets on schedule next year.

Unemployment is rising sharply, however, and the economic contraction this year is now forecast to be worse than previously expected at 3.25 per cent of national output.

Peter Weiss, deputy head of the commission mission to Lisbon, said strong resolve will be needed to overcome opposition from vested interests as the government cuts healthcare costs, reforms the labour market and opens up sheltered services and regulated professions.

Dogged by frail public finances and low growth prospects, Portugal sought international aid a year ago this week. The €78 billion rescue is generally seen in Europe to be working much better than the crisis-plagued Greek intervention but not as well as the Irish bailout. In February both Portugal and the European authorities dismissed suggestions that a second rescue may be needed after German finance minister Wolfgang Schäuble was filmed telling his Portuguese counterpart that Berlin would “be ready” to revise the bailout plan if required.

Reporting yesterday on the latest EU-IMF-European Central Bank “troika” review of the bailout programme, Mr Weiss said there was no reason to believe any further aid would be required once the government continues to execute the plan.

“Our assumption is that the programme is enough. The programme as such is very ambitious. We don’t believe that the government can do more than what is in the programme,” he said.

“Whether Portugal is able to convince markets is, of course, another question. The programme is what the government can do.

“There are elements which are not in the hands of the Portuguese government and may lead to a situation which is not foreseen.”

On the basis that bailout recipients execute their reform plans as foreseen, Mr Weiss said euro zone leaders have given “a sort of general commitment” to continue financing them if necessary.

Although Portugal remains vulnerable to any worsening of economic conditions in recession-struck Spain, Mr Weiss pointed out that the country’s borrowing costs have been declining. The interest rate on Portuguese two-year bonds has fallen to 9.99 per cent from 21 per cent in January.

At the same time, the premium investors charge to hold 10-year Portuguese debt over German debt has dropped to 9.94 percentage points from 16.48 percentage points in January, a figure that remains considerably higher than the comparable Irish figures.

This indicates market investors have more confidence in the Irish rescue than the Portuguese plan. Portugal remains in recession, yet the Irish economy is still projected to expand this year, albeit at a lower level than previously forecast.

However, Mr Weiss said the Portuguese programme was seen in markets to be increasingly credible.

“Portugal continues to have very good programme implementation. The programme implementation is underpinned by broad political support and social consensus,” he said.

“Obviously if Spain is doing less well than what we have assumed so far, then this will have an impact on Portugal’s economy. But we have to a large extent this effect already factored in.”

Portugal “overachieved” its 2011 budget deficit target thanks to the transfer of bank pension funds to the state. “Despite this one-off operation, the structural consolidation in 2011 was large and amounted to 3.5 per cent of gross domestic product,” the commission said.

Mr Weiss said this was an “enormous” achievement. “This is very ambitious,” he said.