June 4, 2012 / 10:54 AM / 6 years ago

Lenders back Portugal's struggle to fend off crisis

LISBON (Reuters) - Portugal’s bailout program is on track and it can hit its targets for 2012 despite some risks, its international lenders said on Monday, offering strong support as Lisbon struggles to avoid following Greece into a second rescue package.

Finance Minister Vitor Gaspar said he would stick to the program after getting a thumbs-up in the latest inspection review by the European Union and IMF, and that the lenders would recommend payment of the next 4.1 billion euro ($5 billion) tranche from the rescue fund.

“There are considerable internal and external risks,” Gaspar said after the lenders deemed the country’s budget targets for 2012 to be ambitious but achievable. “The only certainty we have is that we need to focus on meeting the targets of the program.”

Euro zone officials have been keen to draw a distinction between Portugal and Greece’s mounting troubles.

But with Portugal sunk in recession and unemployment at record levels, some economists say the evaluation may be overly optimistic because European leaders are keen to soothe investor anxiety stirred by intensifying crises in Greece and Spain.

“Had the European situation been a bit better, the troika (lenders) could have flagged weaknesses in the implementation of the consolidation plan,” said Filipe Garcia, head of Informacao de Mercados Financeiros consultants in Porto.

“We will have a lot of difficulty meeting the targets, especially for the budget deficit. The same way Spain was given more time to meet targets, Portugal will eventually get more time as well, but this was simply not the moment to announce it. Now the mission just conveys the good pupil image,” Garcia said.

Three leading Portuguese banks said on Monday they would draw on funding from the bailout to meet tough capital requirements. Gaspar said banks’ liquidity has improved significantly and they were well-capitalized. The bailout set aside 12 billion euros for bank recapitalizations.

Gaspar said that Portugal had met all targets under the fourth quarterly review of the 78 billion euro bailout and that achieving this year’s 4.5 percent of GDP budget deficit target was “viable” despite the risks to the recession-hit economy.

“Overall, this review confirms that the program is making good progress amid continued strong external support,” the evaluating mission said in a statement. “The ambitious 2012 fiscal deficit target remains within reach.”

UNEMPLOYMENT THREAT

Still, the country raised its debt-to-GDP estimate for next year by 3 percentage points to 118 percent from what was agreed earlier with the creditors.

One particular area of uncertainty has been the surge in unemployment, which means the state has to pay out more benefits.

Eurostat said last week that unemployment hit 15.2 percent in April. The government raised its outlook for unemployment to 15.5 percent this year and 16 percent in 2013 on Friday.

The bailout’s budget-squeezing measures have hit companies and consumers and dragged Portugal through its worst recession since the 1970s. The government expects the economy to shrink 3 percent this year and grow just 0.2 percent in 2013.

The mission said it did not discuss new fiscal measures with the government, but urged “close monitoring to detect potential slippages in a timely manner” particularly given the weak labor market.

Even so, Paula Carvalho, an economist at Banco BPI said, “in spite of some pressure on some elements of the budget, the government is likely to meet the budget goals.”

In terms of the yield premium investors demand, Portugal ranks as the second riskiest country in the euro zone after Greece, and economists have warned that Lisbon could be sucked deeper into trouble if Athens leaves the euro.

Portugal was the third euro zone country to seek a bailout after Greece and Ireland. It has won consistent praise from lenders for measures including across-the-board tax hikes and wage cuts for civil servants, reforms of its labor market and legal system, and initiating a privatization drive.

Gaspar said the bailout program “corresponds to the country’s economic adjustment needs” and promised to press ahead with structural reforms and privatizations.

Portugal will have received 75 percent of the funds under the program once the next tranche is paid, and many economists say the country may have to seek more emergency funding. But Lisbon has repeatedly said it needs no more time or money.

Reporting by Sergio Goncalves; Writing by Andrei Khalip; Editing by Ruth Pitchford

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