Portugal wakes up ‘defining’ rescue, and 2.0% recession

Portugal is heading for two years of 2.0-percent recession under a debt rescue, the government said on Thursday and top EU-IMF officials told the Portuguese people they faced a defining test of national effort.

The head of the International Monetary Fund, and the EU Economic Affairs Commissioner said in a statement in Brussels that Portugal had to make “major national efforts” to overcome its deficit and debt crisis.

IMF chief Dominique Strauss-Kahn and EU Economy Commissioner Olli Rehn warned on Thursday that the Portuguese people must deliver “truly national” and “major” reform efforts in exchange for a 78-billion-euro bailout.

They said that the success of a “socially-balanced” programme “will require a truly national effort.”

“We recognise that this programme will require major efforts from the Portuguese people,” they added of what they termed a “defining moment” for the country.

Finance Minister Fernando Teixeira dos Santos, in the first official assessment of the rescue worth $116 billion dollars, said the economy would contract by “about” 2.0 percent this year and next, but would recover in 20013 driven by exports.

The reforms and cutbacks imposed under the rescue are the latest in a series of measures by the outgoing Socialist government in an ultimately unsussessful attempt to avoid becoming the third eurozone lame duck on bailout crutches.

Media here, on the basis of the draft deal reached late on Tuesday, said a key objective was to raise the competitiveness of the economy.

Among the measures would be reform of laws protecting the labour market and cuts in the amount and duration of unemployment benefit, but also a reduction of charges on employment.

Other measures are harsh, but not so tough as some had expected.

The Portuguese people woke up to newspaper outlines of how their living standards will be hit because of the overstrtained public finances and were also waiting to hear the detailed and critical response of the main centre-right opposition SDP party.

Time is short and the climate complicated.

The country holds an early general election on June 5. It was precipitated by the refusal of the opposition to approve another round of budget measures by the Socialist government, and by a deadline of June 15 when Portugal has to redeem debt of about 5.0 billion euros or face default.

“Portugal needs this agreement, party leader Pedro Passos Coelho said on Wednesday, describing the terms presented to him as “tough” but “necessary.”

The EU, European Central Bank and International Monetary Fund have said that a broad consensus across the political spectrum is essential: a guarantee the conditions attached to the three-year debt rescue will be applied, whoever wins the election.

The media, which has had access to the draft agreement has published the main measures.

The public deficit of 9.1 percent last year — three times the eurozone ceiling — must be cut, albeit more slowly than had been intended, to 3.0 percent of output by the end of 2013.

Pensions exceeding 1,500 euros ($2,230) per month will be cut, spending on health services will be reduced and VAT sales tax on some products will rise.

There will be a vast additional programme of privatisations, and a fund will be set up to support banks if they need help.

But the programme does not require abolition of a thirteenth and fourteenth month of pay for civil servants as many had feared.

Economist Joao Cesar told AFP: “I am positively surprised.”

He said: “These measures show that the situation is not so serious as in other countries. I am surprised that the troika recognised this.”

But the measures have come under strong attack from some quarters, notably from trades unions.

“Living conditions for workers, for pensioners and for a large part of the population risk getting worse,” said union leader Manuel Carvalho da Silva.

Also expected at any time is the crucial attitude of the leading opposition right-wing SDP party which, while saying it will not allow Portugal to topple into bankruptcy, has yet to give judgement on the EU-IMF medicine.