The IMF has just approved Portugal’s fiscal consolidation and economic reforms, which the country undertook in return for 78 billion euros of aid granted in May 2011.
One year on in May, a mission of the EU-ECB-IMF troika representing all the donors were optimistic about releasing the fifth tranche of the four billion euro programme, set out over three years. It will enable Portugal to finance itself without market assistance.
Right now the 10 year bond rate of Portuguese debt is enormous, despite dropping from 17.4 percent in January to its present figure of 10.6 percent.
To date, Portugal has even managed to place its short-term debt on the lowest rates since 2010, above those paid by Spain.
But the level of public debt is set to climb to 114.4 percent of GDP in 2012 and 2013 or peak at 118.6 percent of GDP before starting to decline in 2014.
The economic decline in the euro area and notably in Spain, Portugal’s main commercial partner, has clouded the horizon. Tax revenues have fallen and unemployment is forecast to increase from 15.4 percent this year to 15.8 percent in 2013.
According to the IMF, the risk is that cyclical unemployment will become structural. This will burden the social security budget further, jeopardising the goals of deficit reduction.
The goal of 5.9 percent of GDP in 2011 was reached. For 2012 it was set at 4.5 percent, but in the first quarter was already sitting at 7.9 percent of GDP, making the intended three percent goal in 2013 look increasingly precarious.
The government of Pedro Passos Coelho has reiterated its determination to meet the target. But he suffered a serious setback with the recent decision of the Constitutional Court to press for the removal of the 13th and 14th month’s salary for civil servants, even if maintained in 2012.
One year after asking for the bailout from the troika (made up of the European Union, European Central Bank and International Monetary Fund), Portugal faces the fourth assessment on the implementation of the assistance plan.
Brussels says carrying out of the financial measures remains “solid” but it recognises that “risks have increased in recent months.”
euronews spoke to Pedro Sousa Carvalho deputy director of Diario Economico, in Lisbon.
euronews: “We thought that as the Troika was visiting, there could be improvements to the assistance plan. What could the improvements be?”
Carvalho: “The improvement of this programme means two things: in the short term, it means more bailout money and more time, but for the medium and long term, it just means more money.
“In the short term, Portugal should reduce the deficit to 4.5 percent (of GDP), but things are not going very well.
“If we look to our European partners, they have managed to receive special treatment. Spain managed to negotiate one more year to put its affairs in order. The Greek government got two more years to make adjustments. And even Ireland, in the last European Council, managed to reach an agreement that, if necessary, Ireland could also have some flexibility in making adjustments to their programme. So, it would be fair to give some more time to Portugal.”
euronews: “The tensions in the eurozone are affecting the Portuguese economy. Does Portugal still has some room to manoeuvre in order to avoid becoming a second Greece?”
Carvalho: “We have lots of positive things and also different aspects compared to Greece. For instance, Portugal, even with difficulties, is managing to respect everything in the assistance plan agreed with the troika. That, naturally, gives us credibility in the eyes of our foreign creditors.
“At the same time, there’s also political consensus in Portugal even on the economic approach. This year, Portugal, for the first time since the Second World War, will have a balance of trade surplus. That means that for the first time since 1943, Portugal will export more than it imports.
“At the same time, our social situation is a lot different to the one in Greece. Here, we have some strikes and protests, but much fewer than in Greece and they are more peaceful. Portuguese people already understand the message that we need to change our path.”
euronews: “Still, the deficit reduction next year should be around 5.4 billion euros. Could this be too much for the Portuguese economy to bear?”
Carvalho: “I don’t think so. The goal is very ambitious, but next year the Portuguese government, the troika and the Portuguese central bank are predicting that the economy will enter a stagnation period, which means that it won’t be in a recession. But, naturally, if the troika insists on the deficit being three percent next year, which is already an ambitious goal, things could go wrong.
“As, I said, I am confident about the next troika assessment that will happen in August or the beginning of September. In conclusion, if the troika agrees to more flexibility, Portugal won’t complain.”