By CHRIS GRAEME [email protected]
The International Monetary Fund/ European Central Bank/ European Commission ‘Troika’ has given the thumbs up to Portugal in its first quarterly assessment of the country’s austerity measures.
It means that Portugal will get the next tranche of €11.5 billion out of a total bailout loan worth €78 billion.
While praising the Government’s efforts, the ‘Troika‘ representatives warned that the worst was yet to come and pointed out that if Portugal failed to carry out the necessary structural reforms the programme would fail.
“There still remain a number of sweeping reforms in the budgetary sectors,” said IMF Head of Mission representative Poul Thomsen at a press conference at Lisbon’s EU headquarters.
He warned that the State had to relinquish control of State participation in key energy companies, public companies and public-private partnership entities.
The number of local and municipal councils, many of which were virtually bankrupt, also needed to be either merged with others or scrapped altogether.
“This is one of the programme’s challenges that must be met in the coming months,” he said.
The IMF believes that Portugal needs to open up its economy to competitive market forces which would only be possible by introducing planned structural reforms to both the labour and public sector markets.
“If the Government fails in implementing these structural reforms, the programme will definitely fail,” he said in an interview with the TV channel TVI.
The “bad” Greek experience which led Greece to seek a further bailout meant that Portugal could not just rely on cuts and more cuts to solve its problems, but had to create the right conditions for economic growth.
Thomsen added that new and favourable interest rates on the bailout loans and the extended periods to pay them off, agreed in Brussels at the European summit of July 21, showed that Europe was serious about doing all in its power to prevent the sovereign debt crisis spreading.
However, at a meeting in Paris on Tuesday the Germans and French fell short to agreeing to issue so-called Euro bonds as an alternative way of buying up European debt.
Instead German Chancellor Angela Merkel and French President, Nicolas Sarkozy unveiled a raft of radical new proposals which brought the European Union steps closer to a United States of Europe.
The proposals included twice-yearly meetings for EU leaders, a new tax on financial transactions, constitutional limits on member state borrowing and indebtedness, and the creation of an EU economic government and president.
The French-German proposal to limit member state debt is to be enshrined in the European Union constitutions of all member states by 2012.
At the same time German economic indicators for the last quarter showed that the German economy, which had been enjoying growth rates of around 2%, had slowed down to stagnation as its main trading partner, the United States, remained mired in recession.
Poul Thomsen said that now the “ball was in Portugal’s court and it depended in it for the success of its economy and reforms.”State
When asked about the impact that the European economic recession could have on Portugal’s ability to meet the reforms and austerity measures, Thomsen admitted that the situation in Europe was” worse now than when the programme was agreed”.
The Troika maintains its forecast however of two years of recession until 2013 when signs of recovery should become apparent.
“We are confident that our estimates are correct,” he said.
The Portuguese government currently has to tackle a €1.8 billion black hole in public finances worth 1.1% of GDP.
The additional debt has been generated from overspends in salaries and other expenses, the €320 million recapitalisation costs of failed bank BPN, an overspend from the island of Madeira worth €277 million and a reduction in tax receipts caused by unemployment and a consequent increase in dole benefits (€500 million).
The Government has pledged to “cover the black hole” by €840 million from slashed holiday subsidies, €597 million by transferring bank pension funds to State control, €100 million from VAT, gas and electricity increases and €343 million from wage freezes in the public sector.