CORRECTED: Portugal says passes third creditor review

Portugal has got through a third creditors review of budget cuts under a 78 billion euros ($105 billion) bailout package agreed last year, Finance Minister Vitor Gaspar said on Tuesday.

“This positive result illustrates our capacity to apply a demanding programme despite an unfavourable context,” Gaspar told a press conference.

He was speaking after an audit by officials from the European Union, European Central Bank and International Monetary Fund.

“After three regular reviews concluded successfully and four transfers (of funds), we will have received 48.8 billion euros from our international partners, including 4.3 billion euros set aside to recapitalise banks,” the minister said.

Gaspar however lowered the country’s economic growth forecast for 2012 to minus 3.3 percent from minus 3.0 percent, putting the outlook in line with that seen by the European Commission.

Portugal received the rescue in May 2011 in return for a series of tough austerity measures to slash public spending and increase revenues.

The austerity programmes have however slowed the economy and in recent weeks speculation had grown that Portugal may need more help, driving up its borrowing rates.

Earlier this month ratings agency Moody’s said that Europe’s weakening economic prospects “threaten the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness (in Portugal).”

Towards the end of last year there was acute concern on financial markets that the dire state of finance in Greece could cause so-called contagion, pushing Portugal, Spain and Italy into deep trouble and spreading crisis throughout the eurozone.

In the last few days the pieces of a complex package to avert default by Greece have fallen into place, relieving concerns of contagion.

The outcome of this third review of Portuguese reforms in return for rescue funding also bolsters the improved outlook for weak eurozone countries.

At Berenberg bank, senior economist Christian Schulz commented: “When the rescue programme was designed in the spring of 2011, the troika (EU, ECB, IMF) had projected a contraction (of gross domestic product) of 2.2 percent in 2011, while the latest data suggest that the decline was only 1.5%.

“Several fiscal one-off measures also helped to reduce the deficit from 9.8 percent in 2010 to 5.9 percent in 2011 as well.

“The government and the troika left the 2012 deficit target unchanged at 4.5 percent of GDP, despite an intensifying recession. They revised the GDP growth forecast to minus 3.3 percent in 2012, down from the December forecast of the troika of minus 3.0 percent.

“With a fiscal hit of 6 percent of GDP in 2012, the economy will have to rely on net exports and investment for support.”

Schulz said: “Given the experience of Greece, the political and financial significance of receiving positive troika assessments cannot be overstated.

“Greece’s continuous failure to comply with the recommendations of the troika weakened the political support for the country in Northern Europe to the extent that an aid withdrawal became a realistic possibility. The Portuguese government continues to enjoy much more trust by its European partners.”