UPDATE 2-Portugal to do without final bailout payment

Thu Jun 12, 2014 12:54pm EDT

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(Updates with statement by lenders, Moody's, adds byline)

By Axel Bugge

LISBON, June 12 (Reuters) - Portugal has decided to do without the last payment from its international bailout program after the country's constitutional court rejected a series of austerity measures, the finance minister said on Thursday.

The measures rejected by the court were agreed under the bailout that formally ended last month. Economists estimate they have a fiscal cost of about 700 million euros, which would make it harder to reach budget goals.

However, Portugal has easily managed to finance itself in bond markets after the end of the bailout, which means it does not need to rely on other financing as it was forced to do when it sought financial support in 2011.

"The government thinks that it is not the time to make decisions about substitute measures, a decision which has the consequence that we will not receive the last tranche of the programme," Finance Minister Maria Luis Albuquerque told journalists after a cabinet meeting.

Portugal went through three years of austerity under the bailout as it descended into its worst economic downturn since the 1970s. The economy began a fragile recovery in the second quarter of 2014.

The 'troika' of lenders to Portugal's 78 billion-euro bailout - the European Commission, ECB and IMF - said in a statement they "took note" of Lisbon's decision not to complete the final review of the bailout.

"We welcome the government's firm commitment to identify the measures needed to fill the fiscal gap created by the constitutional court rulings, in order to reach the budgetary targets agreed under the programme," they said. "We encourage the government to continue with the ongoing process of structural reform."

'CALENDAR INCOMPATIBILITY'

In order to receive the final payment of 2.6 billion euros, the government would have had to present alternative austerity measures to the European Union and IMF by the end of June. If it had decided to receive the payment and not present alternative measures by the end of June, the bailout programme would have had to be reopened, the minister said.

The minister said the decision was taken because of a "calendar incompatibility" - the government is still awaiting decisions by the court on other measures. The measures had all been agreed under the bailout programme, which formally ended on May 17.

"The government decided not to adopt substitute measures before knowing the extent of the budget problem that it will have to deal with," the minister said.

She reiterated the government's commitment to budget goals agreed with the European Union. The government must reduce the budget deficit to 4 percent of GDP this year and to 2.5 percent next year, from 4.9 percent in 2013.

"We believe this decision reinforces the credibility of the government," she said. "This in no way invalidates our assumed commitments."

German Finance Minister Wolfgang Schaeuble said the decision by Portugal showed its bailout programme had worked.

"The decision by the government in Lisbon today shows the reform efforts have paid off," he said. "Portugal is now managing without European aid and can stand on its own two feet. That's a big success."

"Market financing has been re-established," the Portuguese finance minister said, pointing to a bond auction on Wednesday in which the country sold 975 million euros in 10-year bonds at the lowest yields in years.

Separately on Thursday, ratings agency Moody's warned that the court ruling could make it more difficult for the country to balance its budget by 2018, as planned, adding that it could delay any further rating potential rating upgrades of Portugal.

"The court's decisions raise question marks over whether the planned fiscal consolidation path - achieving a balanced budget by 2018 - can be achieved if important spending categories cannot be reduced," Moody's said. (Additional reporting by Daniel Alvarenga; Editing by Larry King)

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