Portugal recession 'will last two years'

Portugal will sink into recession this year and next due to the terms of its €78bn rescue deal, its finance minister has said.

6 May 2011, 12:00am

3 min read

Fernando Teixeira dos Santos said austerity measures required as a condition of the funds would see the economy shrink by 2% in 2011 and 2012.

Tax rises and privatisations will form part of a major economic restructuring. The head of the European mission said the terms of the bail-out were "tough" but "necessary and fair".

But a key unknown area of the package is what interest rate Portugal will pay to borrow the money. This is expected to be hammered out a meeting of European finance ministers on 16 May.

Portugal was left in no doubt today about the sheer scale of what the tripartite EU, IMF and ECB mission in Lisbon described as "significant headwinds".

The terms of the agreed bailout include smaller pensions, less health spending - and deep benefit and unemployment cuts that will almost inevitably bring on recession.

In particular, the country has agreed to extend and accelerate its privatisation programme. If it can rid state monoliths like the airline TAP and its power utilities of shareholder limitations and heavy government influence, it may help attract outside capital. Today, mission officials seemed hopeful that any new government would stick to the deal on the table.

But questions remain about delivery. The Portuguese have long and painful memories of previous hard times under IMF financial rule. Now they have to accept them again, or face default on government loans due on June 15th. And that's just ten days after next months general election

Under the bail-out terms there will be an additional programme of privatisations, and pensions exceeding 1,500 euros will be cut. The sales tax on some products will rise.

The aim is to cut Portugal's deficit of 9.1% - three times the eurozone's limit - to 3% by 2013.

Juergen Kroeger, who led the European Union's mission, told reporters at a press conference in Lisbon that 52bn euros of loans would come from the EU and rest from the IMF.

But as part of the deal Portugal had to tackle imbalances in the economy, and restructuring the banking sector was necessary, he said.

He accepted that the changes being demanded were "front-loaded" and would be "painful", but they were needed to address urgent issues. "These are major structural reforms that are aimed at fostering competitiveness," he said.

Mr dos Santos said that the restructuring would be tough for the Portuguese people, but added: "This is a programme aimed at returning to growth and employment."

Other measures to be taken include changes to labour market laws and social benefits.

The agreement includes up to €12bn for the stricken banking sector to recapitalise and a requirement that they raise the amount of capital held in reserve to cushion them against a further financial crisis.

Public spending cuts already announced have sparked widespread protests in Portugal and prompted the fall of the government.

The current caretaker Prime Minister, Jose Socrates, resigned in March after parliament rejected his minority government's last austerity plan. There will be a general election on 5 June.

The European officials told the press conference that it was vital that the proposed restructuring got cross-party agreement to avoid the possibility of having to revisit terms after the election.

However, Portugal's key centre-right opposition party pledged on Thursday to respect the terms of the package.

Any domestic opposition may not be the only threat to approving the bail-out.

Next month's meeting of finance ministers to approve the final financial the terms of deal requires the unanimous backing of all 17 member states.

But in Finland the euro-sceptic True Finns did well in last month's general election and have declared opposition to the bail-out of member states.

Asked on Thursday what would happen if Finland holds up the aid package, Jean-Claude Trichet, president of the European Central Bank, said: "I call on all countries to be up to their responsibilities."