IMF approves 26 billion euro loan for Portugal

A trader looks at screens at a bank in Lisbon May 18, 2011.

WASHINGTON (Reuters) - The International Monetary Fund on Friday approved a 26 billion euro ($37 billion) loan for Portugal to help the country recover from a debilitating sovereign debt crisis, saying it would immediately disburse 6.1 billion euros to ease investor concerns over the euro zone member's debts.

The IMF said in a statement that total financing to Portugal in 2011 will include about 12.6 billion euros from the IMF and another 25.2 billion euros from the European Union. The funding is part of a joint IMF/EU 78 billion euro ($110 billion) bailout package.

"The financing package is designed to allow Portugal some breathing space from borrowing in the markets while it demonstrates implementation of the policy steps needed to get the economy back on track," the IMF said in a statement.

The financial package was calibrated to allow Portugal to stay out of the market for medium- to long-term bonds for slightly more than two years, IMF Mission Chief Poul Thomsen said.

Under the agreement, Lisbon will have to carry out steep spending cuts, raise taxes, reform its labor and justice systems, and embark on an ambitious privatization scheme.

"The Portuguese authorities have put forward a program that is economically well-balanced and has growth and job creation at its center," said IMF Acting Managing Director John Lipsky.

"It addresses the fundamental problem in Portugal -- low growth -- with a policy mix based on restoring competitiveness through structural reforms, ensuring a balanced fiscal consolidation path, and stabilizing the financial sector," he added.

The deal follows a 110-billion-euro package for Greece last May and an 85-billion-euro program for Ireland in November.

Portugal's arrangement is the first time a country has asked private investors not to sell down their holdings of bonds on a voluntary basis.

The leader of Portugal's opposition Social Democrats, Pedro Passos Coelho, warned on Thursday the country has no room for failure in meeting the austerity measures of the program.

The conditions included in the bailout are expected to contribute to a contraction in the Portuguese economy of 2 percent both this year and next.

"This is not going to be an easy program. There is going to be a difficult period of adjustment," Thomsen said.

The program addresses a lack of competitiveness among businesses in Portugal, he said. It sets a goal of achieving a deficit that is 3 percent of GDP by 2013.

"Even during the good years, before the crisis, Portugal was hardly growing," Thomsen noted.

Portugal's economy is expected to begin expanding again in two years, he said, adding that many of the initiatives are weighted heavily to the early phases of the reforms.

Poulsen said he believes political consensus behind reforms bodes well for the success of measures to reshape the Portuguese economy.

"It's quite striking how most of the key issues, not least on the structural reform side, have broad political support, which to me is one of the encouraging things," he said.

(Additional reporting by Lesley Wroughton; Editing by Diane Craft, Gary Crosse)