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Portugal faces key tests in turning page on bailout

Published on 22/04/2014

Auditors from the EU and IMF begin their final health check on bailed-out Portugal on Tuesday, a day before the country faces an acid test with a return to regular borrowing on the debt market.

Portugal, set next month to follow Ireland and become the second rescued eurozone country to emerge from near bankruptcy and austerity-driven suffering, is expected to pass both tests with confidence.

But ordinary people complain they will go on bearing the brunt of the radical measures imposed by the European Union and International Monetary Fund in return for rescue loans of 78 billion euros ($108 billion).

Those measures, including a new round being applied now, hacked back public spending, cut pensions and enforced structural reforms to make the economy more competitive and boost exports.

Vice Prime Minister Paulo Portas, commenting on Monday on the visit by the auditors from the EU, IMF and European Central Bank, said: “It’s the final check-up. It is the examination which must enable us to win back our political and financial autonomy.”

The Portuguese are waiting to see the back of those they call “the men in black”, but in the knowledge that the three years of severe belt-tightening will not be relaxed.

The IMF warned on Monday that Portugal must broaden its commitment to budget discipline to ensure it can carry its debt load and retain the confidence of financial markets.

The government is not yet saying how it intends to navigate out of the rescue programme as planned on May 17.

It could opt for a precautionary line of credit or take the route risked by Ireland four months ago — an outright return to the debt market without any backup.

– People pay the price –

The answer is expected before May 5, when eurozone finance ministers are set to approve Portugal’s exit from the rescue programme.

Trades unions say the move will not change the story for their members.

“With or without a precautionary programme, the austerity policy will stay in place. It’s always the same people who will go on paying the price,” said Armenio Carlos, secretary general of the main union federation, CGTP.

A key test will be on Wednesday when Portugal, having already tested the willingness of investors to buy its debt, will make its first regular issue of 10-year bonds since it sought the bailout on April 2011.

The national debt agency is aiming to raise 500-750 million euros in a direct auction to investors.

“Portugal should come through with flying colours. This new issue is a step further on the road to emerging from the rescue plan without an extra line of credit,” said Natixis bank analyst Jesus Castillo.

Portugal is now on the same trajectory as Ireland.

“Portugal’s borrowing rates are coming close to those which applied to Ireland when it announced it was leaving its rescue programme,” in December, Portas said.

At that time the yield or interest rate on Irish 10-year debt was 3.5 percent. The equivalent rate for Portugal now is 3.7 percent.

But BPI bank economist Paula Carvalho cautioned: “Even if the issue on Wednesday is a success, that does not guarantee that the road ahead is without pitfalls. The markets are very volatile.”

Portugal is in the process of enacting new budget measures in line with the latest conditions laid down by the EU and IMF to generate savings of 1.4 billion euros next year.