April 11, 2011 6:45 pm

EU and IMF to drive Portugal bail-out terms

European Union and International Monetary Fund officials will begin talks in Portugal on Tuesday on a programme of austerity measures and economic reforms as a condition for an €80bn ($115bn) bail-out.

“It’s not an exaggeration to call it shock therapy,” said Filipe Silva, head of public debt trading with Portugal’s Banco Carregosa. “The country has to break out of a vicious circle of debt and low growth.”

According to Jan Kees de Jager, Dutch finance minister, Portugal needs to make “a complete U-turn” in its economic policies.

Labour market reforms, tax increases and public sector wage freezes or cuts are among the most politically sensitive measures that the EU and IMF are expected to insist on in return for aid.

Sweeping privatisations, state spending cuts and the liberalisation of energy and other markets are also likely to be at the top of the agenda, according to Portuguese economists.

The delegation of European Commission, IMF and European Central Bank officials is scheduled to spend this week making a “technical assessment” of Portugal’s public accounts, banking sector and economy.

Political discussions on the terms of the bail-out are due to begin on April 18. These will be led by the caretaker government, but are expected to include contacts with leading opposition parties.

Olli Rehn, the EU’s top economic official, expects the final package to be approved at a meeting of eurozone finance ministers on May 16.

This will make bail-out funds available in time for Portugal to meet €7bn in bond redemptions and interest payments that fall due on June 15.

Lisbon has made clear that it can manage its own financing needs until then, including €5bn in payments due on Friday.

José Sócrates, outgoing prime minister, has confirmed that austerity measures drawn up by his Socialist government with input from the commission and the ECB will form the basis for the bail-out negotiations.

The programme was voted down in parliament on March 23, triggering an early election on June 5.

But the centre-right Social Democrats (PSD), the main opposition party and favourites to win the ballot, have agreed to support the same deficit-reduction targets.

These envisage almost halving the deficit this year from 8.6 per cent of gross domestic product in 2010 to 4.6 per cent, with further cuts to 3 per cent of GDP next year and 2 per cent in 2013.

The programme, which follows three previous austerity packages, includes proposals for further cuts in health spending, caps on transfers to state companies and the shelving a big infrastructure projects.

The most sensitive proposal, rejected by the PSD, is for a special tax on all pensions over €1,500 a month. Public sector wages were cut by 5 per cent in January and state pensions frozen.

Mr Rehn has also called for “an ambitious privatisation programme”, which could include a controversial proposal to sell part of state-owned Caixa Geral de Depósitos, one of Portugal’s biggest banks.

The outgoing government’s existing privatisation plans already envisage raising €4.8bn by 2013 from the sale of companies, including TAP-Aip Portugal, the national airline.

Adding to the pressure on Lisbon, the ECB has halted, at least temporarily, the government bond purchase programme it launched last May at the height of the eurozone debt crisis. On Monday, the ECB confirmed it had last week made no bond purchases for a second consecutive week – despite the pressure on Portuguese bonds.

Jean-Claude Trichet, ECB president, has recently stepped up demands that eurozone governments take steps necessary to shore up investor confidence. Since the start of this year, ECB bond purchases have been on a much smaller scale than in the early weeks of the programme.

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