Portuguese banks seek injection, EU-IMF says plan ‘on track’

Three top Portuguese banks will receive a huge injection of public cash, the finance ministry said Monday, as Portugal passed its fourth bailout review to open the way for more EU-IMF rescue loans.

In agreeing to inject more than 6.65 billion euros ($8.25 billion) into the private banks BCP and BPI and state-owned Caixa Geral de Depositos (CGD), Portugal will help them meet tough rules drafted by the European Banking Authority to avert another crisis.

The critical need for funds comes as struggling Portugal, where unemployment is soaring, won approval for another installment from the 78-billion-euro bailout package agreed last year in return for austerity and reforms.

The injection will use funds provided by the international rescue, except for one billion euros to CGD, which as a state-owned institution cannot benefit directly from European Union and International Monetary Fund money.

In announcing the approval, Finance Minister Vitor Gaspar said that EU and IMF auditors would now recommend the release of a 4.1-billion-tranche of rescue loans, though final approval lay with the IMF executive board and EU ministers.

“According to the evaluation made by international institutions, we are respecting our recovery programme,” Gaspar said.

“We met our quantitative objectives,” the minister added, noting a rapid reduction in its external imbalances despite a global economy showing clear signs of slowing down.

“Our budget roll-out remains in line with our 2012 targets and the government should be able to bring the deficit down to 4.5 percent of GDP (gross domestic product) as planned,” he said.

Last year, Portugal became the third eurozone country after Greece and Ireland to be bailed out by the EU, IMF and European Central Bank.

In a statement, auditors from the so-called troika said Portugal “remains on track despite continued challenges,” while stressing that “rising unemployment has emerged as a pressing concern.”

The troika added that growth in 2012 “may hold up better than expected” with GDP in 2012 “now expected to decline by 3.0 percent as opposed to 3.25 percent before and “subdued growth” expected in 2013.

The muted optimism was came after stark warning last week by Portugal’s central bank that the country’s banking sector was vulnerable to a “very major risk of contagion of adverse developments on an international level”.

“These risks are still at very high levels and were exacerbated … by the reinforcement of the connections between the banking system and sovereign risk in a growing number of countries in the euro area,” the central bank said.

The central bank also warned that three of Portugal’s four biggest banks would require state intervention in order to meet the EBA targets, preparing the ground for Monday’s announcement.

Pushed deeper into recession by austerity measures, the government has issued a new outlook for unemployment for 2012 of 15.5 percent, expected to reach 16 percent in 2013.

Gaspar said the deterioration in the jobless numbers required a response that facilitated work.

Work code reforms launched to make hiring more flexible must be pursued, the minister said adding that results would be seen in the “medium term”.

The troika audit statement agreed with the analysis: “Recent approval of the revised labour code should attenuate job losses,” it said.

“Nevertheless, further action to improve the functioning of the labour market is urgent,” it said.

A European Union statement added that the commission would “also support the Portuguese government in its endeavour to tackle rising unemployment in the short term through the reprogramming of the EU Structural and Social Funds.”

Such spending, intended to boost infrastructure and fund reforms, has been touted recently as one tool to offset the negative impact of the austerity measures adopted in the need to balance the public finances.