• Recession in Portugal, lower growth in Ireland - programme countries are in trouble. (Photo: EuroCrisisExplained.co.uk)

Economic gloom poses problems for bailed-out countries

29.08.12 @ 09:46

  1. By Valentina Pop
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BRUSSELS - Recession-hit Portugal is likely to miss its deficit target this year, the troika of international lenders is expected to conclude next month following its return to Lisbon on Tuesday (28 August) to take stock of the bailout programme.

Portugal's tax revenues have shrunk amid harsh austerity measures and as the economy continues to contract at a rate of over three percent.

The Portuguese treasury has made public that it is short of €2 billion in tax revenues compared to what they had expected until July. Government spending has been reduced by 1.7 percent, as required by the terms of last year's €78 billion bailout.

According to the ministry of justice, the number of bankruptcies decreed in courts increased by 77 percent in the first three months of this year compared to the same period last year.

Unemployment is also at a record 15 percent, which means the country is likely to miss its 4.5 percent deficit target this year.

Similar to Greece and Spain, the only way out is for its deficit deadline to be extended or for more austerity measures to be imposed - a decision which may further hurt its economy.

Portugal has so far been among the 'A students' of the bailed out countries, with German and EU officials regularly praising its efforts, in a bid to underline that southern countries can make it out of the crisis through austerity and labour market reforms.

But loosening the terms of the programme for Portugal, while not accepting any such move for Greece, may prove controversial, especially after Spain's own deficit targets were moved twice this year amid a worsening recession.

The troika inspectors from the International Monetary Fund, the EU commission and the European Central Bank is expected to stay for 10 days in Lisbon.

Irish troubles

Meanwhile, the other full-bailout country, Ireland, is forecast to grow less than expected. This will also pose problems for the deficit targets, according to a draft troika report seen by the Irish Examiner.

This year's growth forecast is slashed to 0.4 percent from 0.5 percent, while next year the Irish economy is expected to grow by only 1.4 percent, compared to the previous estimate of 1.9 percent. Exports are also likely to grow more slowly, by 3.5 percent, down from 4.2 percent. Unemployment is set to rise to 14.4 percent by 2014 and start falling only the year after.

"A stress scenario with a 1% lower GDP growth shows that, in the absence of additional consolidation measures, debt would veer away from the sustainable path.

"In particular, sticking to the currently agreed annual adjustment in 2013-15 in the face of lower growth, and thus missing the programme nominal deficit targets, would result in a deficit of 5.2% of GDP in 2015, well above the programme target of below 3% of GDP," the document notes, as quoted by the Irish Examiner.

The same paper, obtained also by the Irish Times, warns the Irish government that there are "no low-hanging fruit left" as a vote on the 2013 budget approaches.

“The 2013 Budget will be a key test of the authorities resolve to continue progressing towards the essential consolidation goals and of their ability to maintain the necessary public support,” it said.

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