September 27, 2023

Government Sees Deep Recession Ahead for Portugal

But even as the terms were being outlined, the challenge facing the country deepened, with the caretaker government forecasting two years of deep recession ahead.

At a news conference in Lisbon, Jürgen Kröger, the chief negotiator for the European Commission, called the €78 billion, or $116 billion, package “tough but fair.”

“We are convinced that the program provides the basis for a more sustainable and competitive economy and is the right means to boost growth and jobs,” he said.

Crucial details remain to be decided, however, chief among them the interest rate Lisbon will be charged by its European Union partners for the bulk of the money, Mr. Kröger said. E.U. finance ministers are to take up the question in Brussels on May 16.

The tentative agreement, which follows three weeks of negotiations in Lisbon between the caretaker government of Prime Minister José Sócrates and officials from the E.U. and the International Monetary Fund, has so far not removed market worries about Portugal’s financial prospects, or those of other ailing euro-area economies.

On Thursday, Spain was forced to offer higher rates to sell €3.4 billion of five-year bonds, a day after Portugal’s financing costs also rose in selling €1.1 billion of short-term debt. The average yield in Spain’s bond sale rose to 4.55 percent, up from the 4.39 percent when Spain last sold such bonds on March 3. The bond sale had a bid-to-cover ratio of 1.9, compared with 2.2 at the last auction.

Interest costs have also recently soared for Greece and Ireland as many investors expect the tough austerity measures included in their rescue packages will actually deepen the countries’ economic slumps and make it even harder for them to balance their budgets and repay their debts.

Underlining Portugal’s difficulties, Fernando Teixeira dos Santos, the Portuguese finance minister, forecast on Thursday that the economy would contract by 2 percent both this year and next — about twice what the government had predicted in March, and even worse than last month’s I.M.F. forecast.

In fact, some analysts are already warning that the bailout could worsen Portugal’s longer term situation.

“Lending money to Portugal that it cannot borrow from the markets at an affordable rate is not doing it any favors,” said in a research note Carl B. Weinberg, chief economist at High Frequency Economics in Valhalla, New York. “The loan package will only increase Portugal’s indebtedness. It will lead to an even bigger default when Portugal has to repay this new lending on top of its prior obligations.”

However, Poul Thomsen, head of the I.M.F. negotiating team, insisted that creditors had been careful to strike a balance between demanding more budgetary tightening and risking stifling further the economy, notably by hurting consumer demand.

Two-thirds of the rescue money will be disbursed in the first of the three years of the program, he said at the news conference in Lisbon. That should take Portugal “out of the markets” for medium- and long-term debt “for a little over two years,” he said, giving Portugal “breathing space” to restore credibility among investors in terms of implementing policies, after failing to meet its deficit target in 2010.

Of the €78 billion total package, two-thirds will come from the E.U. and the rest from the I.M.F.

The creditors argued that it was not possible to compare directly the terms agreed by Portugal with the conditions imposed on Greece and Ireland last year. Still, they played down a claim made by Mr Sócrates on Tuesday that his government had negotiated better terms.

“The program is by no means lighter but is much different,” said Mr Kröger. “In fiscal terms it is not really lighter and in terms of structural it is much deeper.”

For its I.M.F. lending, Portugal will pay an interest rate of 3.25 percent for the first three years, after which it will rise to 4.25 percent, Mr. Thomsen said.

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