Portugal exit plan unresolved amid bailout review

Portugal’s lenders yesterday started their final evaluation of its performance under its bailout, with further reforms on the agenda and the question of a standby loan when it exits the programme next month still unresolved.

In a sign of the review’s forward-looking bias, troika inspectors held one of their first meetings with the main opposition Socialists. Opinion polls put the party on track to win next year’s general election.

The IMF has said a political consensus on not raising expenditure after the rescue programme ends is vital. The fund said on Monday the recent return of economic growth had boosted Portugal’s near- term prospects, but more needed to be done to free up the jobs market to cut unemployment and labour costs.

The Socialists agree the course of fiscal discipline has to continue, but reject further austerity, which the centre-right coalition government will continue to apply this year and next on top of huge tax hikes and spending cuts already implemented under the bailout since 2011.

The government has promised to define by May 5, when the eurozone’s finance ministers are due to meet, whether it will follow Ireland by making a clean exit from its €78bn bailout or request a precautionary loan from the EU to support its debt market funding.

Deputy prime minister Paulo Portas said on Monday the government was still mulling its exit strategy, while pointing out the country’s bond yields were very close to where Ireland’s stood about a month before it exited its rescue programme last December.

Portugal’s benchmark 10- year bond yield hit its lowest level in eight years of 3.68% on Thursday and was trading at 3.74% on Tuesday. Ireland’s yields were at just over 3.5% in late November.

Today, Portugal will hold its first regular bond auction in three years, which analysts see as the last remaining element in its transition back to the debt market. If successful, as analysts expect, the sale is likely to reinforce case for a clean exit.

Portugal has to cut its budget deficit to 4% of economic output this year after beating its target with a 4.9% gap in 2013, and then to 2.5% in 2015. It has to keep reducing the budget gap to keep the structural deficit below 0.5% by 2017 under the EU budget discipline pact, which was endorsed by the Socialists.

Analysts say that regardless of the composition of the next government it will have few options but to stick to the European targets.

— Reuters