Looser bailout terms no panacea for Portugal
BERLIN (Reuters) - In its international bailout of Portugal, the European Union is loosening the fiscal strait-jacket which it imposed on Greece a year ago, in a tacit admission that a tough approach risks squeezing the life out of its most vulnerable members.
But even with the extra time that Portugal has been given to cut its budget deficit and kick its stalled economy into gear, it faces a huge challenge to restore confidence in its finances, given deep structural problems that have turned it into the growth weakling of the 17-nation currency bloc.
Expectations that Greece will eventually have to pursue some form of debt restructuring will continue to hurt market sentiment towards Portugal, as will the risks of backsliding on the bailout terms by a new Portuguese government whose makeup will not be known for more than a month.
"The goodish news for Portugal is that the deal does not appear to involve any additional fiscal tightening," said Jonathan Loynes, chief European economist at Capital Economics.
"But both the Greek experience and Portugal's own position suggest that the bailout is very unlikely to mark an end to the country's problems."
Caretaker Prime Minister Jose Socrates announced the rough outlines of the deal on Tuesday night, although full details, such as the interest rate which Portugal will be charged on its emergency loans, may not be known until mid-May.
The three-year rescue will total 78 billion euros (70 billion pounds), roughly the size of the international bailout of Ireland, which late last year became the second euro zone country after Greece to seek aid.
Economists said this sum, which is expected to include 12 billion euros to recapitalise Portuguese banks, would probably let the country stay out of the long-term debt market for at least three years, compared to a reprieve of less than two years given to Greece when its rescue plan was agreed in May 2010.
Crucially, Lisbon also gets an extra year to cut its budget deficit back to the EU's limit of 3 percent. Portugal, which posted a deficit of 9.1 percent of gross domestic product for 2010, originally agreed with the EU last year on deficits of 4.6 percent in 2011, 3 percent in 2012 and 2 percent in 2013.
The bailout terms now require it to hit 5.9 percent in 2011, 4.5 percent in 2012 and 3 percent in 2013. The 6.1 percentage point shift over three years will be painful, requiring spending cuts and tax rises, but it is smaller than the 7.1 percentage points over three years originally targeted by Greece's plan.
And Portugal's target of raising 5.3 billion euros from privatisations through 2013 seems easily achievable compared to the 50 billion euro programme now being pursued by Greece, a country with roughly the same population.
"Based on the information that is currently available, the conditions of the programme don't look especially tough," said Ralph Solveen, an economist at Commerzbank in Frankfurt.
That may be more a reflection of the particular type of ills that afflict Portugal's economy than an acknowledgement that the country faces an easier task in trimming its debt than the euro zone's other fiscal basket cases.
Ireland's problems are mainly the product of ailing banks which lent recklessly during the "Celtic Tiger" boom years. Greece's are due to years of economic mismanagement, tax-dodging and corruption.
Portugal's problems are less exotic but in some ways more complex to crack. Unemployment has been rising for nearly a decade, education levels are far below the euro zone average and the country depends heavily on low-skill industries such as textiles, where competition from powers such as China is fierce.
Wages have grown much faster than productivity while high severance payouts and strict rules to protect employment have discouraged hiring, and a bloated public service has complicated the task of cutting the budget deficit.
Economists who follow Portugal closely say these deeply ingrained problems could take up to a decade to solve. That makes Portugal's three-year deadline to emerge from the bailout seem tight, especially as the economy is not expected to return to growth until 2013 at the earliest.
An official source told Reuters on Wednesday that the deal sealed with the so-called troika -- the European Commission, the European Central Bank and the International Monetary Fund -- foresaw contractions in GDP of 2 percent in both 2011 and 2012.
This means that like Greece, which is struggling through its third straight year of recession, Portugal is unlikely to grow its way back to a sustainable fiscal path.
"Slow growth and external imbalances fuelled by very poor competitiveness have to be addressed," said Gilles Moec, an economist at Deutsche Bank. "Any assessment of the Portuguese package will crucially depend on the growth strategy it contains."
The bailout agreement includes provisions for Portugal to reform its labour market through steps such as cutting redundancy payments and reducing the scope for collective bargaining, as well as reforms of its inefficient justice system, according to documents seen by Reuters.
GREEK DEBT THREAT
Also clouding Portugal's prospects is the threat of a Greek debt restructuring. Many economists believe a radical restructuring of Greece's 327 billion euro sovereign debt, involving cuts in the principal owed to private creditors, is inevitable.
The Greek government, ECB officials and EU officials deny that, but as long as these worries persist, so will concerns that Portugal and Ireland could eventually be forced to take similarly aggressive steps to ease their debt burdens.
Politics, both domestic and international, also pose a considerable risk to the bailout plan. Members of Portugal's main opposition party, the Social Democrats (PSD), met with troika members on Wednesday and said they would render their verdict on the bailout deal by Thursday.
Their support is crucial as Portugal faces an election on June 5 which could vault the PSD into power. The biggest risk may well be that Socrates' Socialists win a narrow victory over the PSD next month, a result that polls suggest is possible.
That would increase the risk of a prolonged, contentious coalition-building period, which could undermine support for the bailout deal when it comes before a new parliament.
Softer terms for Portugal could also increase opposition to the bailout deal in northern European countries such as Finland, Germany and the Netherlands, where public pressure to involve private creditors as well as taxpayers in rescues is rising.
The eurosceptic True Finns party in Finland has hardened its position against a Portuguese aid deal since its surprisingly strong performance in an election last month, and it is unclear whether a bid by prime minister-elect Jyrki Katainen to separate the bailout issue from coalition talks will succeed in averting a Finnish veto.
Under the complex set of rules that govern major EU decisions, Finland's new parliament will have to approve the Portuguese deal for it to go through.
(Editing by Andrew Torchia)
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