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27th Jun 2022

Portuguese bail-out expected to push country into recession

  • The IMF will provide €26 billion in loans, the rest comes from the European side (Photo: Fotolia)

Portugal's €78 billion EU-IMF bailout is expected to push the country into a two-year recession, outgoing finance minister Teixeira dos Santos has said.

The deal will mean "deep reforms and profound changes for our country" said dos Santos, including an overhaul of the public sector and the selling of state-owned stakes in important companies.

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He also admitted that it is likely to cause the Portuguese economy to contract by 2 percent both this year and next, while unemployment is expected to rise to 13 percent in 2013, from the current 11 percent.

The emphasis of the bail-out is strongly on structural reforms aimed at boosting productivity with Portugal's economy stagnant even before the economic crisis struck.

Under the terms of the package, Portugal must cut its budget deficit by 3 percent by 2013, it has also agreed to freeze public sector wages and pensions until the end of 2013 and reduce by 1 percent the number of civil servants in 2012 and in 2013.

The austerity measures are similar to those rejected by parliament last month, which precipitated the downfall of Prime Minister Jose Socrates' centre-left minority government and caused snap elections.

Underlining the toughness of the programme, the head of the European Commission negotiating team also called into question Prime Minister Jose Socrates' assertion that the terms of the deal would be less burdensome than the rescue packages of Greece and Ireland, the other two eurozone countries forced to resort to asking for a bail-out.

"The programme is by no means lighter but is much different. In fiscal terms, it is not really lighter, and in terms of structural it is much deeper," said Jürgen Kröger according to the Irish Times.

The IMF will provide €26 billion in loans at a rate of 3.25 percent for the first three years, and 4.25 percent subsequently. The interest rate on the remaining European part of the loan will be decided at an EU finance ministers' meeting next week.

But the bail-out, the third for the 17-country eurozone, comes amid rising resentment in wealthier northern countries about helping troubled periphery economies.

It has already sparked some acerbic comments by German politicians while it remains unclear whether the Finnish parliament will approve the plan, opposed by both the Social Democrats and the nationalist True Finns.

Finland is currently negotiating a new government following elections last month. Centre-right Jyrki Katainen, expected to be the country 's next prime minister, is hoping to have a clear Finnish position on the bail-out by ahead of the finance ministers meeting on 16 May, with the deal needing the greenlight of all eurozone countries.

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