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Revision call as troika reviews Portugal bailout

Revision call as troika reviews Portugal bailout
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Officials from the European Union, the international Monetary Fund and the European Central Bank started their seventh evaluation of Portugal’s economy on Monday.

The so-called troika inspectors’ review is to make sure Lisbon is meeting the terms of its 78-billion-euro bailout as recession drags on for a third year.

The government would like to see budget deficit goals eased as deep austerity undermines economic growth and unemployment has risen to a record level at just under 17 percent.

Things are set to get worse this year as the government launches huge tax hikes and plans to cut four billion euros in spending

Lisbon and the troika of lenders had been expecting gross domestic product to contract just one percent this year after a slump of 3.2 percent last year.

But the European Commission already downgraded its 2013 forecast for Portugal on Friday, to a contraction of 1.9 percent.

The Commission also raised its budget deficit forecast for 2013 to 4.9 percent, compared to the country’s official goal of 4.5 percent.

“The problem is that if the recession deepens the budget goals become more difficult,” said Rui Barbara, chief economist at Banco Carregosa.

“Basically, the troika has to give attention to the impact the measures are having on GDP and unemployment. The focus seems to be the government’s request for one more year, let’s wait and see.”

Prime Minister Pedro Passos Coelho signalled last week the country would struggle to bring the budget gap to below Europe’s three percent target next year.

But despite the country’s deep economic recession, the troika has praised Portugal’s reformist drive since it received the bailout in mid-2011. Investors have also shown faith in Portugal’s adjustment, by snapping up its bonds in the past year and driving its 10-year bond yields down to around 6.3 percent now from 17 percent a year ago.

The officials are likely to be further impressed by the country’s first bond sale since the bailout — a 2.5 billion five-year bond issued in January.