EC says Portugal bailout 'on track'

Portugal is making progress with reforms aimed at bringing its finances back to health and should be able to return to markets in 2013 as planned, the European Commission said today.

Portugal received a three-year, €78 billion bailout from the European Union and the International Monetary Fund last year after its borrowing costs on the markets rose to unsustainable levels on concerns about the country's large debt and low growth, caused by poor competitiveness.

Some investors remain concerned that it will have to follow Greece in seeking a further bailout that could involve losses for private sector creditors.

"Overall, the programme is on track. The fiscal adjustment in 2011-2012 is remarkable by any standards," said the Commission's third review of Portugal's progress in reforms.

Tranches of the money from international lenders are conditional on Lisbon meeting agreed reform targets. This time, the Commission, which together with the IMF and the European Central bank reviews Lisbon's progress, praised Portugal.

"Compliance is extraordinarily good for Portugal," said a European Commission official presenting the report who declined to be named.

Asked if Portugal would need a second bailout, if it may not be able to return to markets, the official said:

"Our assumption is that the programme is enough. Whether Portugal can convince markets, is another question of course," the official said.

"For the time being our assumption is that the programme is on track and should lead to Portugal regaining markets access in 2013," the official said, noting Portuguese yields have already come down on the secondary markets thanks to its good performance.

Portugal's 10-year bond yields have fallen to 11.8 per cent from 17.4 per cent at the end of January.

Still, the commission also warned that "important risks and challenges remain", citing a possible further increase in unemployment beyond current projections, which include a 14.4 per cent jobless rate in 2012. Eurostat data showed today unemployment hit a record 15 per cent in February.

The lenders' projections point to a slight drop in unemployment next year to 13.9 per cent.

Portugal is in its worst recession since the 1970s, with the government and the lenders expecting a 3.3 per cent slump this year and only meagre growth of 0.3 per cent in 2013. The Bank of Portugal expects a contraction of 3.4 per cent this year and zero growth in 2013.

Asked what would happen if Portugal could not return to markets in 2013, the official said:

"We are not preparing for this now, because it is not in our assumptions. If there is a need to revise this view, we will come back to it. Heads of state and government have given a general commitment that, if necessary, they could continue to finance programme countries if the programme is implemented."

The commission report said that the necessary deleveraging of the financial sector in Portugal was progressing in an orderly manner and that reforms in labour and product markets to raise competitiveness, growth and job creation were advancing as well.

Reuters