Portugal's bailout lenders have agreed to ease its debt-reduction targets amid deteriorating economic prospects, the finance minister said today.
Finance Minister Vitor Gaspar warned that fully restoring the country's financial health will take decades and "the efforts of a generation."
His assessment of Portugal's record under a bailout programme that has locked it into harsh austerity measures and tough economic reforms produced some grim numbers for what is one of the euro zone's weakest economies.
The Portuguese economy contracted 3.2% last year and is forecast to shrink 2.3% in 2013 for a third year of recession in a row, Gaspar said.
The unemployment rate, currently at a record 17.2%, is forecast to climb to 18.5%in 2014, he said.
"We're in a very deep recession," Gaspar told a news conference. "We're enduring levels of unemployment that have never been seen in our country."
The numbers were the latest in a series of negative revisions as Portugal's economic outlook has progressively worsened and public hardship has deepened. The steep downturn has brought calls from business leaders, trade unions and opposition parties for the government to shift its efforts away from spending cuts and towards encouraging growth.
But Gaspar insisted Portugal is on the right path and will stick with austerity. The sacrifices will start paying off in 2014, when the economy is predicted to grow 0.6%, he said.
Portugal needed a €78 billion rescue in May 2011 when investors, worried by its high debts and meagre growth, stopped lending it money.
The bailout lenders - the International Monetary Fund, the European Central Bank and the European Commission - agreed to grant Portugal an extra year, until 2015, to get its budget deficit below 3% after a review of how the country is progressing, Gaspar said.
The lenders concluded that Portugal is abiding by its commitments under the bailout programme and are releasing the latest batch of €2 billion, he said.
The new deficit targets are 5.5% of gross domestic product this year, 4% in 2014 and 2.5% in 2015. They were recalibrated to take into account the economic slowdown, Gaspar said.
It is the second time Portugal has had to revise its targets as it struggles to get traction in its recovery efforts. The government says last year's budget deficit was 4.9% of GDP, within the 5% target.
But the European Union's statistical office has refused to include revenue from the €3.1 billion privatisation of airport management company ANA and other one-off effects in the deficit calculation - a decision that may push the 2012 deficit to 6.6%, Gaspar said.
Public debt is predicted to peak at 123.7% of GDP next year. That is higher than the previously estimated 122.3% for 2014. Public debt will fall below 60% of GDP - the government's long-term target - only in 2040, according to Gaspar.