Cause and Effect in European Politics and Law

Portugal receives 78 billion euros loan from the EU and the IMF

Ralitsa Kovacheva, Desislava Dimitrova, May 8, 2011

The European Commission, the IMF and the Portuguese government agreed on an economic programme, which Portugal will have to perform in order to obtain a bailout of 78 billion euros. The three-year programme has been supported by the main political parties, as Olli Rehn announced, European Commissioner for Economic and Monetary Affairs in a joint statement with Dominique Strauss-Kahn, Managing Director of the International Monetary Fund in.

This was a key precondition the agreement on the loan, in order to ensure that the programme would be implemented regardless of who would win the early elections on 5 June. The programme must be approved by the Council of EU finance ministers on 16 May (Ecofin). They have to determine the interest rate that Portugal will pay on its bailout. It is expected the rate to be approximately the same as Greece's, which has recently been reduced to 4%, i.e. much lower than the Irish one loan - 6%.

In return, the Portuguese Government has to fulfill three main types of measures: "pro-growth measures aimed at making the country competitive again and creating jobs - especially for the young people"; "ambitious fiscal measures needed to reduce the public debt and deficit"; "measures aimed at ensuring the stability of Portugal’s financial sector".

The country will have to reduce its budget deficit to 5.9 percent this year, 4.5 percent in 2012 and 3% in 2013 (from 9.1% in 2010). Its public debt is expected to stabilise in 2013. However, according to the parameters, set in the programme, the country will sink into a two-year recession, the economy will contract by 2 percent in 2011 and 2012 and a recovery of the economic activity is foreseen in 2013.

Fiscal consolidation measures provide for 3.4% reduction of expenditure and 1.7% increase of revenue. Salaries and pensions (except the lowest) will be frozen, while pensions above 1500 euros will be taxed. The number of employees in the central administration would be reduced by 1 percent annually, and in the local authorities - by 2% annually. The unemployment benefits will be paid for one and a half year, unlike now– for three years - and will be reduced from 1258 euros per month to 1048 euros per month (according to The Financial Times). 5.3 billion euros are expected to come from privatisation of state assets. At the same time, the country is committed to carry out reforms in the budgetary framework and quality of public finances, social and health care systems, labour market, public administration, judicial system.

Regarding the financial sector, the objective is to guarantee banks' ability to continue to finance the economy. In the next 18 months, banks will have to significantly increase their core Tier 1 capital to 9% in 2011 and to 10% in 2012. “Backstop facility of 12 billion euros” is allocated to the banking sector. Media commented that the European institutions and the ECB had learned their lesson from Greece that shock measures do not help, so the programme of Portugal is significantly lighter than those of Greece and Ireland.

The last major unknown is what will be the position of the new Finnish government to the Portuguese loan. According to media reports, senior European officials have started exploring possible ways to push through the Portuguese deal without Finnish support, should that prove necessary. The goal is the loan to be approved before the elections in Portugal on June 5. Moreover, on 15th of June Lisbon must make a payment of 5 billion euros on its debt.