Portugal warned about ‘deep recession’

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Portugal’s €78bn ($116bn) financial rescue package is chiefly aimed at lifting economic growth and creating jobs, according to the finance minister in the country’s caretaker government.

But Fernando Teixeira dos Santos warned on Thursday that Portugal would suffer two years of deep recession, with the economy contracting by 2 per cent in both 2011 and 2012, before a recovery began.

“This is not merely a programme of economic and financial austerity, but a package designed to re-launch growth and make the economy more competitive,” he said.

The minister said the caretaker government signed the formal agreement with the European Union and the International Monetary Fund at a cabinet meeting on Thursday.

He said the €78bn in loans would cover Portugal’s financing needs over the coming three years. However, the package was designed so that Portugal could “return to the markets” to finance its debt as soon as possible.

But debt issues by the Portuguese government this year and next would be “almost insignificant”.

Mr Teixeira dos Santos added that it was “premature” to estimate the interest rate that would be charged on the loans.

Financial support for Portugal’s banks was a key element of the rescue package, he said, designed to overcome liquidity restrictions and help banks improve their loan-to-deposit ratios.

Portuguese banks were not in difficulty, he said. The €12bn earmarked for banks was needed to ensure they had the financial strength and liquidity to finance the economy.

Earlier, Portugal’s two main opposition parties, the centre-right Social Democrats (PSD) and the conservative Popular party (CDS-PP), separately expressed their support for the agreement.

The EU and IMF has insisted on broad political support for the bail-out package, which will be implemented by a new government to be elected in a general election on June 5.

Pedro Passos Coelho, the PSD leader who is ahead in most opinion polls, and Paulo Portas, the CDS-PP leader, both said there were committed to meeting the fiscal and other targets set out in the three-year agreement.

Mr Teixeira dos Santos said the Portuguese authorities assumed full “ownership” of the package, emphasising that it had not been imposed on the country by the EU and the IMF.

Political consensus in support of the measures was vital to their success, he said.

Jürgen Kröger, head of the European Commission negotiating team, said on Thursday. “The success of the programme lies in its swift implementation...The next government has to take responsibility for the programme and implement the measures.”

Paul Thomsen, head of the IMF delegation, said the programme was based on a “three-pronged strategy of structural reforms, fiscal consolidation and prudent financial sector policies to deal with long-standing problems of low growth, lack of fiscal sustainability and excessive financial sector leverage”.

Ollie Rehn, the European commissioner for economic and monetary affairs, said the agreement included “a set of pro-growth measures aimed at making the country competitive again and creating jobs – especially for the young people of Portugal.”

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