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New Portugal govt faces rush to start implementing bailout

Whatever the outcome of Sunday’s general election in Portugal, the new government will face a race against the clock to put in place the demanding programme of reforms agreed with the EU and IMF in exchange for a 78-billion-euro bailout.

“The country faces three big challenges: first apply the programme, second, apply the programme, third, apply the programme,” outgoing Finance Minister Fernando Teixeira dos Santos said last week.

“Whoever wins the elections won’t even have time to sit down,” he warned.

After months of resistance, Portugal in April became the third country in the euro zone to seek international assistance to meet its debt payments after Greece and Ireland last year.

The terms of the three-year bailout deal were negotiated in a hurry, without waiting for the outcome of the early elections sparked by the resignation of Socialist Prime Minister Jose Socrates’ minority government in March after parliament rejected his latest package of austerity measures.

But all three main political parties — the centre-right Social Democrats who are ahead in the polls, the conservative CDS-PP and the Socialists — signed the bailout deal.

The country has already received 12.6 billion euros ($18.1 billion) of the bailout money which will allow it to repay around 7.0 billion euros in debt and interest payments due in mid-June.

Under the bailout terms, Portugal must reduce its public deficit to the eurozone limit of 3.0 percent of GDP in 2013, from 9.1 percent last year.

By the end of the year the deficit must fall to 5.9 percent of output, which will require a savings of 5.7 billion euros. To meet this goal the new government that emerges from the elections will have to quickly get to work.

The incoming administration will also have to put in place important structural reforms aimed at reviving an economy which has posted flimsy growth for over a decade and is expected to shrink by around two percent this year and next.

By the end of July a team from the EU, IMF and European Central Bank — the so-called “troika” — will visit Lisbon to evaluate the progress that has been in implementing the bailout programme.

By then the next government, which will have been in office for just a few weeks, will need to have decided what new austerity measures to put in place.

It will also have to find a buyer for nationalised bank BPN and give up its so-called “golden shares” in listed companies such as former state monopoly Portugal Telecom.

During the second half of the year, parliament must vote for a new package of austerity measures for 2012 as well as key reforms aimed at loosening the country’s rigid labour market laws, promote greater competition in the energy and telcoms sectors and speed up the nation’s courts.

To curb the rise in the nation’s public debt, which hit 160 billion euros in 2010, the equivalent of 93 percent of GDP, the government will have to speed up the pace of its privatisations, starting with the sale of TAP-Air Portugal and its stakes in power firm EDP and power grid operator REN.

“The key will be what austerity measures will be decided and how quickly the implementation and the results can be seen in hard data such as revenue and expenditure,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London.

“Given that Portugal’s problems are to a very large extent structural in nature, ‘quick fix’ solutions are very unlikely, however. This, in turn, requires a solid start into a long haul race — a bumpy start would increase the fear that problems may mount over time.”

In recent weeks several economists have warned that the timeframe to implement the measures agreed to in the bailout deal is too short.

“Between now and the end of 2011, there are dozens of measures to be adopted, which from a human and technical point of view is almost impossible,” former finance minister Antonio Bagao Felix said Wednesday.