Brussels, 10/05/2011 (Agence Europe) - On Tuesday 10 May EU Economic and Monetary Affairs Commissioner Olli Rehn announced that the European Commission had endorsed the three-year austerity programme that Portugal had agreed to as the price to pay for international aid of some €78 billion (see EUROPE 10371, 10372 and 10373). He said the interest rate on the EU loans would be set by the Eurogroup on Monday 16 May and would be between 5.5% and 6%, but would not be as high as 6%. Eurozone finance ministers are working to the IMF rules that add a percentage to the market value to cover the cost of risk.
Olli Rehn said that the European Commission had endorsed the Portuguese reform programme for 2011-2014, on which agreement was reached last week by representatives of the European Commission, the European Central Bank and the International Monetary Fund, adding that he was sure that Eurogroup on Monday would also endorse the deal. The austerity programme is backed by politicians across the party divide in Portugal and therefore, he said, there should not be any doubts about whether it would be properly implemented after the country's general elections on 5 June. The commissioner pointed out that in order to be successful the measures would need to be introduced fast and in full. Europe wants to ensure that whichever party wins the elections, Portugal will apply all the measures negotiated by the current socialist caretaker government. The centre-right opposition is expected to win the elections, but there is the danger that the new government would have only a slender majority.
Commissioner Rehn described the economic adjustment programme as tough but realistic. He said that although difficult to stomach, it provided protection for the most vulnerable in society, describing the situation in Portugal as different from Greece and Ireland and therefore justifying a different series of measures. He explained that the Portuguese problem was economic stagnation and low growth, but predicted that Lisbon would be able to roll over its debt on the markets again before the end of the three-year austerity programme.
Asked whether Finland or other member states might refuse to agree to the package unless further austerity measures were added, Rehn said a unanimous decision was required from the Eurogroup, meaning that all member states' votes counted. He said he was sure that Finland, which has yet to decide whether to endorse the Portuguese aid package, would be able to back the financial stability of the eurozone as a whole. Asked about potential changes to the austerity measures, the commissioner said that the member states made their own decisions and decided themselves on the scale and details of aid packages, but the austerity measures that had been thrashed out fully respected the mandate conferred by the ECOFIN Council in April 2011. Rehn clearly rejected the idea that Finland's financial contribution should reflect Finnish banks' exposure to the danger of Portugal defaulting on its debt, commenting that this was not the right way to look at the issue. He explained that Europe's financial markets were all in the same boat and countries like the United States and China were providing aid through the IMF.
The strings attached to the Portuguese aid (loans of €78 billion over three years) cover three areas - consolidating public finance, structural reforms and bank bailouts. The EU will provide €52 billion from the EFSF and the EFSM, and the IMF €26 billion.
Portugal will be required to cut its public deficit to 5.9% of GDP this year, then to 4.5% in 2012 and 3% in 2013. The country has been given an extra year to meet the EU's budget rules but the current situation is worse than first announced. Eurostat has certified that Portugal's deficit reached 9.1% in 2010 (rather than the 7.3% forecast last autumn). Portugal's debt reached 93% of GDP in 2010. Rehn expected the debt to start to come down in 2013. Two-thirds of the budget reductions will be achieved by cuts in expenditure and a third by increasing tax revenue. It is forecast that the country will be in recession in 2011 and 2012, seeing a 2% reduction in GDP.
Portuguese banks will have to increase their core Tier 1 capital to 9% by the end of the year, and 10% by the end of 2012. Some €12bn has been earmarked to this end. The banks will also have to continue to get out of debt.
The negotiations lasted three weeks, longer than for the Greek and Irish loans, mainly because of problems with agreeing on the structural reforms. The public sector will be slashed and Rehn said that rigidities on the labour market would have to be removed and greater entrepreneurship fostered. The measures include slashing healthcare spending, reducing the civil service by 8,000 a year, putting an 18-month time limit on unemployment benefit and introducing a special tax on any retirement pension of above €1,500 a month. Direct taxation will be increased by removing loopholes for individuals and companies, as will indirect taxation, with increases in VAT and tobacco duty. The national airline, TAP, will be sold off, along with energy giants EDP and REN and many public-private partnerships will be adjusted. (M.B./transl.fl)