May 4, 2011

Portugal Bailout Terms Likely to Cause Recession

Conditions could cause two years of economic contraction

A three-year agreement was reached for a bailout for Portugal, Prime Minister Jose Socrates announced late Tuesday, but the terms are harsh. Because of the stringent requirements and conditions attached to the 78 billion euro ($116.1 billion) package, an official source said Wednesday that the rescue was likely to push the country into a deep 2-year-long recession.

According to a Reuters report, Socrates, who currently holds his post as a caretaker, said that the agreement with the European Union (EU) and the International Monetary Fund (IMF) on the terms of the rescue package represented a victory for Lisbon. He explained that the agreement did not include some of the tough provisions that both Greece and Ireland had been saddled with in their own bailouts.

However, an official source was cited as saying that the austerity measures that were included in the bailout were so stringent that the rescue would bring a "contraction of 2% in gross domestic product in 2011 and in 2012." According to the source, higher taxes are in store on both property and cars, and deductions for health, education and housing will be reduced.

Jonathan Loynes, chief European economist at Capital Economics, has also foreseen a 2% contraction in Portugal's economy for the year. In the report he was quoted as saying, "Against this background, while the confirmation of the bailout should provide some reassurance that Portugal will be able meet its upcoming bond redemptions, it won't put an end to speculation that—along with Greece and perhaps others—it will sooner or later need to undertake some form of debt restructuring."

However the Portuguese regard the bailout, bond markets took it as a positive sign, with bond yields falling for the first time in weeks. Opposition leaders were scheduled to meet later on Wednesday with EU and IMF officials to gain their acceptance of the terms, in advance of elections due on June 5; whoever wins the election will be responsible for the implementation of the bailout.

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