Bloomberg News

IMF Says Portugal Faces Risk From ‘Rising Stress’ in Europe

December 20, 2011

(Adds details on 2012 budget plan, updates with more IMF comments from seventh paragraph. For more on the euro crisis, see EXT4 <GO>.)

Dec. 20 (Bloomberg) -- The International Monetary Fund said the European debt crisis is a “serious” risk to Portugal as the nation seeks to meet the targets of its financial aid program and return to bond markets in two years.

“Portugal’s program has remained broadly on track, but rising stress in Europe is a serious risk,” the Washington- based lender said today in a report. “Substantially higher capital requirements across Europe, coupled with cuts in exposure to the periphery, are placing further pressure on banks and the flow of credit. Further negative spillovers could significantly complicate domestic policy making.”

The IMF’s executive board yesterday approved a disbursement of 2.9 billion euros ($3.8 billion) to Portugal after completing the second review of the country’s performance under the aid program.

Prime Minister Pedro Passos Coelho is cutting spending and raising taxes to meet the terms of the 78 billion-euro aid plan from the European Union and IMF. As the country’s borrowing costs surged, Portugal followed Greece and Ireland in April in seeking a bailout and now plans to return to bond markets in 2013.

“Strong policy implementation remains key to regaining access to medium and long-term sovereign debt markets by late 2013,” the IMF said. “Market conditions may not favor rapid restoration of sovereign and bank access to external debt markets, while spillovers from worsening conditions in other euro area countries would have a negative impact on external demand and confidence.”

Ireland Prospects ‘Fragile’

The IMF also said today that Ireland’s European benefactors should take steps to create a firewall around the nation, as its prospects remain “fragile” amid the escalating euro-region debt crisis.

Portugal’s 2012 budget includes a plan to eliminate the summer and Christmas salary payments for state workers earning more than 1,100 euros a month. Tax deductions will be reduced and the government plans to increase the value-added tax rate on some goods. Spending cuts in 2012 represent 4.4 percent of gross domestic product, including reductions on health-care spending, while revenue increases represent 1.7 percent of GDP.

“The strong 2012 budget rightly refocuses the fiscal strategy on expenditure cuts and helps re-establish credibility,” the IMF said in today’s report.

Working Hours Increase

Portugal also plans to sell shares in airport operator ANA- Aeroportos de Portugal SA and in airline TAP SGPS SA by the end of 2012. The government will also allow private sector working hours to increase by 30 minutes a day.

“The program’s success remains crucially dependent on strong progress in structural reform,” the IMF said today. “Implementation of a wide range of reforms to improve competitiveness and open up the economy to competition is needed to tackle Portugal’s decade-long growth stagnation.”

Portugal’s economic expansion has averaged less than 1 percent a year for the past decade. The economy will shrink 3 percent next year, the European Commission forecast on Nov. 10. It would be one of only two euro-area countries to contract, the other being Greece with a 2.8 percent drop, according to the Commission’s forecasts. The euro area is forecast to expand 0.5 percent.

The Portuguese government expects to narrow its budget deficit this year to 4.5 percent of GDP or less, helped by the transfer of banks’ pension funds to the state, Passos Coelho said on Dec. 13. “If we did not have extraordinary measures this year, our deficit would be very close to 8 percent,” he said.

Christmas Tax

The Portuguese government said on Dec. 2 that the value of the planned transfer of banks’ pension funds to the state may reach 6 billion euros. The government has also announced an income tax surcharge on Christmas salary payments for public and private sector workers to help cover the shortfall this year.

The government said it would aim to trim the budget deficit from 9.8 percent of GDP in 2010 to 5.9 percent in 2011, 4.5 percent in 2012, and to the EU ceiling of 3 percent in 2013. Debt will reach 100.8 percent of GDP this year and peak at 106.8 percent in 2013 before declining, the government forecast on Aug. 31. Debt was 93.3 percent of GDP in 2010.

--With assistance from Gail DeGeorge in Washington. Editors: Gail DeGeorge, Kevin Costelloe

To contact the reporter on this story: Joao Lima in Lisbon at jlima1@bloomberg.net

To contact the editor responsible for this story: Tim Quinson at tquinson@bloomberg.net


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