IMF, EU learnt from Greek, Irish bailouts: analysts
An EU and IMF rescue deal struck with Portugal seems to have corrected mistakes made in the Greek and Irish bailouts, with more realistic targets and less stifling austerity demands, analysts say.
“The package of measures seems less aggressive than for Greece and Ireland, which shows that the EU and the IMF realised the formula used (before) had put a stranglehold on economic growth,” said Joao Pereira Leite, an economist at Carregosa bank.
“Some lessons have been learnt,” added Commerzbank analyst David Schnautz, with the Portuguese targets seemingly “much more realistic.”
Portugal became the third country in the 17-member eurozone group to require external financial aid, unveiling measures on Thursday to slash its massive public deficit in exchange for a 78-billion-euro ($116 billion) bailout from the European Union and International Monetary Fund.
The deal, which must be confirmed by European finance ministers by mid-May, should see Portugal reduce its public deficit from 9.1 percent of GDP last year to three percent by 2013.
The rescue plan focuses on restoring competitiveness, growth and jobs.
“When designing a programme like this, it is important to avoid excessively fast fiscal consolidation and financial sector deleveraging,” according to the head of the IMF mission, Poul Thomsen.
“Going too fast would cause a large contraction in demand before the structural reforms that are aimed at boosting the economy’s growth potential,” he said, adding the plan struck an “appropriate balance”.
“There is no question that this is an ambitious, tough programme. But equally important, it is also a realistic programme and a fair one.”
Measures to rein in Lisbon’s public deficit will see pensions and health spending slashed, unemployment benefits stripped down and public salaries which have been reduced by five percent this year frozen.
A feared abolition of two months of bonus pay for civil servants did not come to pass, and VAT sales tax will be kept at 23 percent.
The loan, whose repayment conditions have yet to be finalised, should only mature in about 10 years, according to Thomsen.
“It is a good agreement,” outgoing Prime Minister Jose Socrates has said, insisting Portuguese citizens had it easier than their Greek and Irish counterparts who saw salaries cut and massive public layoffs.
The IMF and EU have described the Portuguese programme as “socially balanced”, warning it would require “major efforts from the Portuguese people” while supporting the government’s wishes to protect the most vulnerable groups.
“The Greek experience has served Portugal well, benefiting from more favourable conditions with a longer payback period and interest rates close to those that Greece obtained after the revision in March from 5.2 percent to 4.2 percent,” said Jesus Castillo, an analyst at Natixis investment bank.
“In putting the bar too high, one risks new market sanctions like happened for Greece,” where the public deficit reached 10.5 percent of output last year — more than the 9.4 percent targeted in the Greek rescue plan, he said.
Portugal faces a deadline of June 15 to get external aid, when it has to redeem debt of about five billion euros or default.
A year ago, Greece was forced to appeal to the EU and IMF for a bailout loan of 110 billion euros in return for an overhaul of its economy.
Now a year later, talk is on of restructuring Greece’s soaring 340 billion euro debt, which the country insists is “viable”, having already secured a repayment extension on its EU and IMF loan.
Ireland, sinking under huge debts racked up by its banks, was rescued last year with an 85-billion-euro bailout, but Moody’s last month cut the country’s credit rating because of an “expected decline” in government finances it predicted would hold back recovery.