Markets Losing Faith in Portugal

While all three countries will benefit in the short term from the loans coming from the European Union and the International Monetary Fund, their ability to continue to raise affordable short-term funds from international investors is considered crucial. Interest costs have 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.

Portugal’s ability to secure more relaxed deficit targets from the I.M.F. — 5.9 percent of gross domestic product this year as opposed to an earlier promise from Lisbon of 4.6 percent, and 4.5 percent in 2012 compared with an earlier pledge of 3 percent — suggests that concerns are building in Washington and Brussels that too much austerity could have a detrimental effect.

Greece, for example, has had an extremely difficult time meeting the deficit targets mandated by the I.M.F. as its economic downturn has deepened. Despite a small export boomlet, Ireland, meanwhile, has seen little sign of a recovery in domestic demand. Portugal’s economy is expected to contract this year and next, which would be one of the longest recessions in Europe. Hampered by an uncompetitive export sector, its return to growth will most likely be long and slow as interest rates in Europe are poised to rise.

Under the three-year financial assistance package, 12 billion euros, or about $18 billion, will be channeled as new capital to Portuguese banks that have been shut out of the financial markets for more than a year because of investors’ concerns about Portugal and other suffering euro economies, according to a draft of the agreement published on the Web site of Expresso, a Portuguese magazine.

In return for the aid, Portugal has committed to the sale of state-owned assets aimed at raising 5.5 billion euros. It intends to sell shares before the end of the year in EDP, the energy company, and TAP, the flagship airline.

The aid program also foresees Portugal raising sales taxes on goods like cars and cigarettes, while cutting corporate tax exemptions and public subsidies to private companies. As part of an overhaul of labor legislation, severance payments will be reduced, while unemployment benefits are expected to end at 18 months rather than three years.

Among measures to cut the public sector wage bill, the government will reduce staffing of its central administration by 1 percent a year between 2012 and 2014, and by 2 percent for regional and local administrations. The reductions will take place by natural attrition.

Marie Diron, a senior economic adviser to Ernst Young, said the package was “surprisingly light on fiscal measures, probably reflecting the fact that Portugal already had significant plans in place and that further tightening measures would face decreasing returns.”

The draft agreement, however, did not specify the interest rate payable on the money lent to Portugal, making it difficult to assess a claim by Prime Minister José Sócrates late Tuesday that his government had negotiated “a good deal that defends Portugal,” as well as better terms for its bailout than those accepted last year by Greece and Ireland. The government is expected to confirm the terms Thursday.

The $115.5 billion rescue package, or 78 billion euros, was in line with estimates made last month by senior European officials of what Portugal would require. “The size of the package signals the determination of the E.U. authorities to ring-fence problems in the periphery, especially given the elevated market concerns about Greece and subsequent contagion risks that could arise from that,” analysts at Barclays Capital wrote in a research note Wednesday.

Mr. Sócrates resigned in March after Parliament refused to endorse his proposals for additional austerity measures. To break the political deadlock, Portugal is set to hold a general election June 5. Mr. Sócrates is leading a caretaker government in the meantime.

Some analysts, meanwhile, poured cold water on the favorable comparison drawn by Mr. Sócrates with bailout packages for other countries. With an election ahead, Mr. Sócrates is hoping to reap political benefit from negotiating a bailout, even as center-right opposition parties are blaming him for the problems that have forced Portugal to seek a rescue in the first place.

Mr. Sócrates “may have gone too fast in going public on the package, sidelining the opposition and spinning his role in the negotiations as a protector of his electoral base,” Gilles Moec, an analyst at Deutsche Bank, wrote in a research note Wednesday.

The caretaker government officially asked for assistance last month after failing to meet its 2010 deficit target and after a series of credit rating downgrades pushed Portugal’s borrowing costs to record highs. Those developments heightened concerns about the country’s ability to meet refinancing obligations.

Stephen Castle contributed reporting.

Article source: http://www.nytimes.com/2011/05/05/business/global/05portugal.html?partner=rss&emc=rss