chief negotiator

Portugal Praised for Progress on Financial Overhaul

But as international lenders were delivering an upbeat review of Portugal’s progress, the country’s finance minister announced a steep increase in the tax on electricity and natural gas consumption to ensure that Portugal cuts its budget deficit this year by more than a third.

Vitor Gaspar, the Portuguese finance minister, warned that the government was still short of its deficit-to-gross domestic product goal for the full year, by about 1.1 percentage points.

To be on track, he said Friday, the government needed to increase its tax proceeds by an additional 100 million euros ($142 million) in the fourth quarter by raising the value-added tax on electricity and natural gas to 23 percent from 6 percent.

Still, officials from the International Monetary Fund, the European Commission and the European Central Bank said during a televised news conference in Lisbon that they were confident Portugal would meet its goal of reducing its budget deficit to 5.9 percent of G.D.P., from 9.1 percent in 2010.

“We have observed some public expenditure overruns, but we don’t expect these to continue in the fourth quarter,” said Jürgen Kröger, the chief negotiator for the European Commission.

Analysts at Barclays Capital wrote in a note to investors that the review was “marginally positive news” and added that new spending controls would be needed eventually. Offsetting spending increases with one-time tax increases is “certainly not helpful at a time when economic activity is in the process of declining to an already large planned fiscal contraction,” they wrote in the note.

The officials representing international lenders were in Lisbon this week to complete their first quarterly review of Portugal’s progress since they agreed on the terms of the bailout in May. Their favorable assessment paves the way for the government to receive another installment of financial assistance in September, of 11.5 billion euros ($16.4 billion).

Portugal has already received about 20 billion euros ($28.4 billion) of the bailout financing, which the previous Socialist government requested in April to meet debt refinancing obligations and avoid a default.

The international lenders also insisted that Portugal’s three-year overhaul program was not under immediate threat because of the deepening concerns about the euro debt crisis and the financial difficulties of larger European economies like Italy and Spain.

“I am very confident that there will be no need for new money” for Portugal, said Poul Thomsen, who has been leading the bailout negotiations on behalf of the I.M.F.

Mr. Thomsen also argued that “even if the headwinds are stronger,” Portugal’s position had been strengthened by the agreement in July among Europe’s leaders to ease financing terms for Greece and other rescued euro economies.

“The decision of European leaders means that the ball is in Portugal’s court,” Mr. Thomsen said. “Europe will do whatever it takes as long as Portugal pursues the reforms.”

The jump in the natural gas and electricity tax comes as Portuguese households already face a recession that the government and other institutions expect to last until the end of 2012. The decision could also raise concerns that the center-right government was relying heavily on punishing tax increases rather than on spending cuts to improve its budgetary situation.

To stick to the deficit target, Pedro Passos Coelho, who was elected prime minister in June, also recently announced a one-time tax on the traditional Christmas bonus paid to Portuguese employees, to raise 800 million euros ($1.1 billion).

Still, officials representing the lenders said they expected the government to put much more emphasis on spending cuts next year as more structural changes are made. Over all, they noted, Portugal is committed to delivering about two-thirds of its budgetary improvement through spending cuts.

“Without comprehensive structural reforms, there is a clear risk that the program becomes all about cutting and not growth, which is what it should be about,” Mr. Thomsen warned.

The international lenders also praised Portugal’s efforts to strengthen its banking sector despite unhappiness among domestic bankers about having to meet by year-end core capital requirements that are above those set under international banking rules.

“The authorities are off to a good start,” said Rasmus Rüffer, an official from the European Central Bank. “It is important to continue to strengthen the capital buffers of the banks and bring about an orderly deleveraging.”

Article source: http://www.nytimes.com/2011/08/13/business/global/europe-likes-portugals-progress-on-financial-overhaul.html?partner=rss&emc=rss

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.

Article source: http://www.nytimes.com/2011/05/06/business/global/06portugal.html?partner=rss&emc=rss

Portugal Praised for Progress on Financial Overhaul

Government Sees Deep Recession Ahead for Portugal

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