May 2, 2014 / 1:51 PM / 5 years ago

'Mission accomplished' as Portugal passes last bailout review

LISBON (Reuters) - Portugal’s economy has passed a final review by its EU and IMF lenders, paving the way for a smooth exit from its 78 billion euro bailout program this month, the country’s deputy prime minister and creditors said on Friday.

A couple walks past a closed shop in downtown Lisbon July 5, 2013. REUTERS/Jose Manuel Ribeiro

Portugal has passed all reviews of its economy under the bailout, which it signed up to in mid-2011 as the euro zone debt crisis engulfed the country, triggering its worst downturn since the 1970s.

“The conclusion (of the review) implies that the program is on a good path to its completion,” Deputy Prime Minister Paulo Portas told a news conference, adding that Portugal had made deep sacrifices to “regain its economic sovereignty”.

“Everybody in the government shares with all Portuguese a feeling of mission accomplished,” Portas added.

Portugal has enacted harsh austerity measures and economic reforms under the three-year bailout, including public sector salary cuts and the largest tax increases in living memory.

Experts from the ‘troika’ - the European Commission, the European Central Bank and International Monetary Fund - finished their review on Thursday after a two-week visit to Lisbon.

“The program remains on track to be concluded, following completion of this final review,” the troika said in a statement. “The program has put the Portuguese economy on a path towards sound public finances, financial stability and competitiveness.”


But they warned that Portugal needs to stick to reforms and cut its budget deficit after the end of the bailout on May 17.

“With the program ending, it will be essential that Portugal commits to sound economic policies for the medium term,” they said. “The currently favorable economic and financial conditions should not lead to complacency.”

“Portugal cannot return to financial irresponsibility (after the bailout ends),” said Portas.

On Wednesday, the government outlined its long-term budget plans, saying it may start reversing public sector salary cuts from 2015 while maintaining budget deficit reduction targets. Portugal must cut the deficit to 4 percent of gross domestic product this year and to 2.5 percent in 2015.

Portugal’s economy started growing again last year and bond yields have fallen sharply, which economists say makes it likely the government will opt to exit the bailout without a precautionary loan program in place.

Portugal will be the second euro zone state to complete a rescue program after Ireland did so in December.

Lisbon needs to return to fully financing itself in debt markets when it leaves the bailout behind.

“Portugal’s access to sovereign debt markets has improved markedly amid robust investor demand and sharply declining yields,” the creditors said.

“This reflects domestic economic developments, in the context of a broader market rally across the region.”

Portugal’s 10-year bond yields currently trade at 3.65 percent - close to the lowest levels in eight years - after peaking near 17 percent at the peak of the debt crisis in 2012.

Portas said the government would meet on Sunday to decide how to exit the program. Prime Minister Pedro Passos Coelho would make a statement after the meeting, he added.

“The Portuguese PM is likely to announce the government’s intention to go for a ‘clean exit’ before Monday, May 5, when the next Eurogroup meeting (of European finance ministers) starts,” said Eurasia analyst Antonio Roldan in a report.

Olli Rehn, who is on leave from his post as EU Economic and Monetary Affairs Commissioner to run for the European Parliament in elections later this month, told Reuters he expected Lisbon to make a smooth exit from the bailout program.

“I expect Portugal will make a successful clean exit and return to the international bond markets shortly, according to the plans of the Portuguese government,” Rehn said.

Additional reporting by Georgina Prodhan in Vienna; Writing by Axel Bugge; Editing by Gareth Jones

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