Lenders give Lisbon blessing to quit bailout programme

May 2, 2014 / Financial Times - http://www.ft.com/intl/cms/s/0/beecf7bc-d215-11e3-97a6-00144feabdc0.html?siteedition=intl#axzz30js1KoOl

Lenders give Lisbon blessing to quit bailout programme

By Peter Wise in Lisbon

International lenders have ended their final review of Portugal’s three-year bailout on a positive note – paving the way for Lisbon to wind up its €78bn rescue programme in two weeks.

Pedro Passos Coelho, prime minister, is expected to announce on Sunday a clean exit from the programme. Officials say Portugal will follow Ireland in not seeking the safety net of a credit line to ease its return to capital markets.

Lisbon’s exit will leave Greece and Cyprus as the only eurozone states still under assistance.

“The successful completion of Portugal’s programme is a political success for Europe’s reformers that shows the euro crisis is virtually over,” said Christian Schultz, a senior economist with Berenberg Bank.

After their last quarterly review of the bailout, the European Commission, In­ternational Monetary Fund and European Central Bank said on Friday: “The programme remains on track to be concluded.”

The “troika” of lenders said Portugal had moved its external current account from a substantial deficit to a surplus, more than halved its budget deficit and maintained the sustainability of its public debt, which is currently close to 130 per cent of national output.

But they added that Lisbon needed to make “a decisive break with the past” and commit “to profound and lasting change” to en­sure “self-sustaining growth and prosperity”. It should guard against complacency.

Implementing the tough adjustment programme had involved “unavoidable sacrifices by the Portuguese people”, they said. But it had succeeded in putting the economy “on a path towards sound public finances, financial stability and competitiveness”.

Lisbon has seen government borrowing costs tumble in recent months as investor sentiment towards struggling eurozone economies has improved. This has enabled it to build a capital buffer sufficient to cover about a year of state borrowing needs.

However, the troika said that legal challenges to austerity measures currently under review by the constitutional court were among “important downside risks” and could lead to “higher quality measures” being replaced by reforms of “low­er certainty and quality”.

The lenders called for an agreement between political parties, business and trade unions on “the broad contours of a strategy to strengthen the economy’s prospects”. Portugal’s opposition Socialists – ahead in opinion polls – have so far resisted pressure from the government and international lenders to back a cross-party agreement on medium-term fiscal policy.

“With a general election coming up in 2015, historically low borrowing costs and the troika leaving the country soon, it is likely that necessary reforms will be postponed,” said Antonio Roldán, an analyst at the Eurasia Group.

Paulo Portas, deputy prime minister, said the successful conclusion of the final review of Portugal’s bailout compliance meant it could now regain the “portion of sovereignty” it had surrendered to its creditors.

The rescue programme had made Portugal a “protectorate” of its international lenders, he said, because national laws had had to be negotiated with the troika before being submitted for approval by parliament.