EU-IMF experts praise Portugal, but warns of risks from recession

Tuesday 03 April 2012 13.17
Portugal meeting its EU-IMF targets
Portugal meeting its EU-IMF targets

Portugal is meeting debt-rescue targets and could be strong enough to borrow on financial markets next year, EU and IMF auditors said today.

But they also warned that the country is in a deeper recession than thought.

The economy is now set to shrink by 3.25% this year, pointing to a worse recession than expected so far with contraction forecast to be 3%. 

Concerns are growing that Portugal may possibly need a second round of rescue help from the EU and IMF.

There is a resurgence of concern that Portugal is near a danger zone of possibly needing a second round of rescue help from the EU and IMF, and that Spain is also at risk of needing help.

But the creditors commended the Portuguese government for having cut the budget deficit to 4.2% of GDP, sharper than a 5.9% target. Portugal still faces risks, the experts from the European Union, The European Central Bank and the International Monetary Fund, warned.

Portugal last year became the third euro zone country after Greece and Ireland to be bailed out, receiving an EU-IMF package worth up to €78 billion in return for a commitment to reform its economy and impose austerity measures.

Since the beginning of the year and particularly in the last month, tensions over the euro zone debt crisis have eased, largely because of progress by the euro zone in increasing emergency funding if further bailouts are needed.

"Overall, the programme is on track. But important risks and challenges remain," the European Commission said in a report based on the latest assessments of Portugal by the troika, conducted in late February.

"Noticeable progress has been made in the area of structural reforms. The far-reaching and ambitious reform agenda is on track in the areas of labour market, health care, housing, judiciary and the insolvency and regulatory framework including competition. Also, privatisations so far have been highly successful," the report stated.

The auditors said that economic conditions in Portugal had worsened markedly towards the end of last year and that there was concern about a weakening of the external trade balance.

The tough reforms and unprecedented action to correct public finances have put the country in deep recession. Some analysts believe Portugal could be unable to return to the markets as planned by September 2013, and so have to seek additional help.

Portugal is to test the bond markets tomorrow with an issue of 18-month debt, the longest maturity it has tested since being rescued.