February 28, 2012 / 3:00 PM / 7 years ago

Portugal passes bailout review by "troika"

LISBON (Reuters) - Portugal passed the third review by the European Union and IMF of its 78-billion-euro bailout program on Tuesday and the country’s finance minister said it would not end up needing a second rescue like Greece.

The lenders said Portugal’s economic slump will deepen this year, however, and urged more reform efforts.

Inspectors recommended the bailout’s next tranche of 14.9 billion euros be paid after finding Portugal had met fiscal goals and launched reforms to make the economy more competitive.

“The program is on track, but challenges remain,” the EU, European Central Bank and International Monetary Fund said in a joint statement. “Policies are generally being implemented as planned and economic adjustment is underway.”

“Nevertheless, more efforts are needed to clear Portugal’s structural reform backlog in the network and sheltered services sectors,” the document said, also calling on the government to step up the pace of reforms already being implemented.

Portuguese Finance Minister Vitor Gaspar said his country would not be seeking more funding beyond the current bailout.

“We will not ask for more time or money,” Gaspar said, adding there was no discussion of that during the IMF/EU team’s evaluation of the economy. “There will be no signal coming from the government other than meeting the terms of the program.”

Greece was forced to seek a second bailout after failing to mend its finances with initial aid.

Gaspar did change the government’s outlook for this year’s economic slump - the deepest since the 1970s - to a contraction of 3.3 percent from a previously forecast 3 percent decline.

He also said unemployment, which is already at record highs, would worsen this year. The jobless rate will now reach 14.5 percent, up from the government’s previous estimate of 13.7 percent.

CHALLENGES

Portugal’s centre-right government has raced ahead with reforms of the uncompetitive economy in recent weeks, especially of its rigid labor market, in an effort to win approval from creditors and ensure the country can ride out its debt crisis.

European officials have also been eager to distance the euro zone’s second most risky country from troubled Greece.

“Most of the adjustment is expected for 2011 and 2012, and the economy should start expanding again from next year,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a statement on Tuesday, referring to Portugal’s reform efforts.

But many economists say the country may have to seek more emergency funding or even be forced to restructure its debts like Athens.

Diego Iscaro, an economist at IHS Global Insight in London, said the economic outlook remains a key risk for Portugal. He expects a slump of 3.7 percent this year.

“We are currently working on an assumption that they will need a second bailout before the end of the year due to a combination of the recession and the fact that bond yields remain high,” Iscaro said.

The lenders themselves said the “economy will continue to face headwinds” but a slow recovery should take hold in 2013, supported by private investment and exports.

Evidence of Portugal’s continued slump came with the release on Tuesday of data showing business confidence fell to a new record low in February.

“Portugal has the lowest rating in the euro zone now that Greece is in default, so we assess that if there is a probability of default, it’s higher in Portugal than in any other country in the euro zone,” S&P analyst Moritz Kraemer told Reuters. [ID:nF9E7L4023]

Kraemer said Portugal’s situation was different to Greece, partly because it is seen as more able to implement adjustment.

“But on the other side of the coin you have a really poor growth prospects for some time to come while the deleveraging both in the public and the private sector runs its course.”

Reflecting those concerns, Portuguese bonds have failed to fully benefit from the rally in other European peripheral government bonds in recent weeks.

Portuguese 10-year bond yields rose slightly on Tuesday to 13.07 percent.

The lenders said that as long as Portugal perseveres “with strict program implementation, the euro area member states have declared they stand ready to support Portugal until market access is regained.”

Portugal hopes to return to raise debt in bond markets in the second half of 2013 under the bailout, in which it must cut its budget deficit to 4.5 percent of gross domestic product this year from 5.9 percent last year - a goal that was met thanks to a one-off transfer of banks’ pension funds to the state.

The lenders said they expect Portugal to meet the budget deficit goal if current policies are maintained and if downside risks to the economic outlook do not materialize.

Additional reporting by Andrei Khalip, Paul Carrel; Writing by Axel Bugge; Editing by Catherine Evans/Jeremy Gaunt

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