* Lenders give Portugal extra year to make spending cuts
* Now expect economy to slump 2.3 pct, not 1 pct, this year
* Finance Minister says lender review was difficult
* Unemployment expected to peak higher and later
By Sergio Goncalves
LISBON, March 15 Portugal's lenders eased its
budget goals on Friday and gave it more time to make unpopular
spending cuts, acknowledging the country's compliance with its
bailout programme will not prevent its economy from slumping
Finance Minister Vitor Gaspar said Portugal remained on
track to exit its rescue programme in mid-2014 following a
longer-than-usual bailout review that he described as difficult.
But it must do with an already fragile economy looking
shakier than ever.
The inspectors from the 'troika' of international lenders -
the European Commission, IMF and European Central Bank - who
cleared the way for the next 2 billion euro tranche of loans
said they expect Portugal's gross domestic product to slump by
2.3 percent this year.
That forecast is far worse than the 1 percent drop they
predicted during their previous review in November - starkly
illustrating the impact of successive waves of austerity on
prospects for growth.
"This review was difficult. Europe still lives a period of
crisis," Gaspar said. "We all know how this external setting
affects the Portuguese economy."
The lenders said in a statement that "program implementation
remains broadly on track, against the background of difficult
Last month, the European Commission forecast Portugal's
economy would shrink by 1.9 percent this year, mainly blaming
"The (new) macroeconomic outlook seems more realistic and is
in line with our projections," said Paula Carvalho, economist at
Banco BPI. "The current numbers are more realistic, the previous
ones were too optimistic."
With resistance to further austerity within Portugal having
gathered pace in recent weeks, the lenders granted an extra
year, until 2015, for Lisbon to make permanent spending cuts
worth 2.5 percent of GDP, or roughly 4 billion euros.
That carried echoes of events in Brussels, where EU leaders
meeting to discuss ways of reviving growth faced calls from
thousands of protesters to put an end to the austerity blamed
for record unemployment in parts of Europe.
In central Lisbon, about 2,000 civil servants marched in
protest against austerity, carrying banners reading "Out IMF."
LONG AND PAINFUL ROAD
Portugal's recession is in its third year and is the
country's worst since the 1970s - brought on by a fall in
consumption and investment after the government imposed painful
tax hikes and spending cuts under the 78-billion-euro bailout.
"This is a process that we knew would be long, but at this
stage we had expected more promising results in terms of growth
and job creation," said Filipe Garcia, head of Informacao de
Merados Financeiros, a consultancy. "In the wider context,
Portugal is a byproduct of the fact that Europe is following
non-expansionist strategies to fight the crisis."
Growing demands for an easing of the government's austerity
programme have come not just from the leftist opposition, but
also increasingly from businesses. Some business leaders have
already said one extra year to cut the deficit is not enough and
called against further spending cuts.
The troika also agreed to ease this year's budget deficit
goal to 5.5 percent of GDP from 4.5 percent previously, Finance
Minister Gaspar said. They had already eased the targets once
Next year's deficit target will now be 4.0 percent compared
to 2.5 percent previously - which becomes the 2015 goal.
Gaspar said the seventh review had "opened the way for the
adjustment programme to end in June 2014," as scheduled.
Under the programme, Portugal was due to return to bond
markets in the second half of this year. But it already launched
a 5-year bond in January and Gaspar said the conditions "appear
appropriate for a possible bond issue in the coming weeks."
Portuguese 10-year bond yields were unchanged around 5.97
percent on Friday, near their lowest levels since the end of
2010, before the country sought its a bailout.
Fellow euro zone bailout recipient Ireland sold 10-year
bonds earlier this week, in its biggest step yet towards exiting
its rescue programme later this year.
For Portugal, while economic growth is still expected to
return next year, that too was revised lower, to 0.6 percent
from 0.8 percent, Gaspar said.
Debt will now continue rising, to peak around 124 percent of
GDP in 2014.
Unemployment, which hit a record 16.9 percent at the end of
last year, pressuring the budget and stoking protests, is now
expected to climb to 18.2 percent this year and 18.5 percent in
2014. Previously, the European Commission expected the jobless
rate to peak at 17.3 percent this year.
The Portuguese, who had shown much tolerance for austerity,
have stepped up protests and strikes since the middle of last
year, when the government reversed a hike in social security
contributions which angered thousands.