Portugal on track but problems elsewhere a threat: IMF

Bailed-out Portugal is on track to meet its debt-rescue targets but faces “formidable challenges,” the International Monetary Fund said Thursday, warning that the EU might have to stand by promises of more support.

The country faces a tough task to get into strong enough shape to borrow the funds it needs by returning to the bond market next year, the IMF said.

“Programme implementation remains solid but formidable challenges remain,” an IMF staff paper released a day after the fund, the lender of last resort, approved a 5.17-billion-euro ($6.79 billion) installment of rescue funds.

IMF officials in Washington said after a regular joint review that Portugal was making “good progress” on its economic programme under a 78-billion-euro EU-IMF rescue agreed last November.

The IMF staff review Thursday echoed that finding but also highlighted the difficulties and risks ahead, in particular an aggravation of the debt crisis in other eurozone countries which could knock Portugal off track.

It said Portugal was generally implementing its programme as planned and fiscal and trade deficits were narrowing.

“However, the recession will likely deepen in the short term and unemployment, already higher than envisaged under the programme, is likely to rise further in the coming months,” it warned.

The economy is now set to shrink by 3.25 percent this year.

The IMF staff report said the government would have to work hard to ensure it cuts spending and raises tax revenue while undertaking reforms to boost growth in order to restore its access to private debt markets.

But it warned that even if Lisbon did so, problems elsewhere could hurt.

“In particular, adverse developments in other (eurozone) periphery countries could, as in the recent past, prompt further loss of confidence, not just among international but also domestic investors, deepening the recession,” it said.

“Should these circumstances arise, euro area leaders may be called upon to make good their pledge of providing adequate financial support for Portugal, as long as performance under the programme remains on track.”

Last month, Greece clinched a second, larger EU-IMF bailout which included a big writedown of its debt.

Eurozone leaders have insisted that the restructuring of the Greek debt was a unique case and Portuguese officials has vigorously said they intend to implement the current bailout in order to avoid the need for a second.

The IMF staff report said the prospects of success of Portugal’s programme “remain reasonably strong.”

It encouraged Portuguese leaders urgently to come up with a set of reforms that would quickly boost employment and growth.

“The reforms to date … are at best a down payment towards the comprehensive set of reforms needed to address Portugal’s growth and competitiveness problems,” the report said.

Peter Weiss, the European Commission’s deputy head of mission in Portugal, said on Tuesday that the current programme “is very ambitious and we don’t believe the government can do more than what is in the programme.”

He said they believed the current programme would be sufficient but acknowledged: “There are elements which are not in the hands of the Portuguese government and may lead to a situation which is not foreseen.”