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CORRECTED: EU, IMF warn of risk to Portuguese budget targets

Portugal can still reach its 2012 budget targets but the risk of failure has grown significantly, officials from the European Commission and International Monetary Fund said on Tuesday.

The goal of reducing Portugal’s public deficit to 4.5 percent of gross domestic product this year is achievable but might be hampered by a large drop in tax revenues in the slowing economy, the European Union’s executive arm said.

It was reporting on progress made since Portugal was thrown a lifeline worth 78 billion euros ($96 billion) in May 2011 to prevent it from going under.

The Commission acknowledged that Portugal was generally on track with respect to the terms of the bailout, which was a joint effort by the EU and the International Monetary Fund.

Auditors from the EU, IMF and European Central Bank completed a fourth audit Portuguese finances last month, approving the release of a 4.0-billion-euro tranche in bailout loans to bring the total aid disbursed to 57.1 billion euros.

Since the end of the audit, Portugal said its public deficit hit 7.9 percent of GDP at the end of the first quarter, making the 4.5 percent end-year and the 2013 3.0 percent targets difficult to reach.

“If fiscal revenues continue to fall, (budgetary) targets are at risk,” IMF mission head Abebe Selassie said from Washington.

The IMF said in its own report that adjustments may prove necessary but Selassie stressed that for the moment there was no need to review targets.

In its report, the IMF said authorities are “making progress in reducing economic imbalances” but that “a turnaround in investor sentiment has nonetheless proved elusive.”

Portugal is struggling to correct its public finances and restructure its economy under conditions laid down by the EU and IMF in return for the debt bailout.

Last week, the national central bank said the economy is set to shrink by a slightly improved 3.0 percent this year, in line with troika estimates.

The Portuguese central bank was less optimistic than the IMF, EU and ECB, the so-called “troika” of creditors, regarding the outlook for 2013.

The three creditors expect Portugal to manage growth of 0.2 percent but the central bank expects stagnation.

The IMF report added that Portuguese borrowing costs were markedly lower than the levels observed earlier this year.

But they “are still elevated, reflecting concerns about the high level of indebtedness” as well as scepticism about the effectiveness of policies at the eurozone level, the IMF said.

Meanwhile, the national statistics institute reported that exports rose sharply in May after a flat April.