IMF Outlines Joint Support Plan with EU for Portugal

Joint financing package of €78 billion agreed for Portugal

Main goals are to restore competitiveness, growth, and jobs

Package will provide breathing space needed to establish strong record of policy implementation before return to the markets

The EU has pledged a total of €52 billion. The IMF’s contribution will amount to €26 billion, to be provided over three years under the Extended Fund Facility.

Portugal is the third member of the 17-country euro area to seek assistance from the IMF, after Greece and Ireland. Its growth rate has averaged only 1 percent during the past ten years, making it the slowest growing economy in the euro area. This lack of growth, combined with the impact of the global financial crisis, has resulted in a large fiscal deficit, high levels of debt, and persistent unemployment.

The financing package provided by the IMF and Portugal’s partners in the EU is intended to give the country the breathing space it needs to address its longstanding problems.

In an interview, the IMF’s mission chief for Portugal, Poul Thomsen, discusses the challenges facing the economy, and outlines the details of the policy package announced by the caretaker government in Lisbon.

IMF Survey online: What are the main objectives of the policy package agreed with Portugal?

Thomsen: The government’s program is bold but realistic. It comprises basically a three-pronged strategy.

The first priority is to tackle the longstanding and deep-rooted structural problems that have caused Portugal to have the lowest rate of growth in the euro area over the past decade and the highest level of unemployment in over a decade.

The second priority is to strengthen fiscal policy. A carefully balanced mix of measures—amounting to about 10 percent of GDP, including those in the 2011 budget—will reduce the budget deficit to 3 percent of GDP by 2013, and stabilize public debt.

The third priority is to ensure the stability of the financial sector. We have included measures that will increase banks’ capital positions, strengthen regulation and supervision, and have introduced a new solvency support mechanism, which is fully financed under the program.

IMF Survey online: How did you balance these different goals?

Thomsen: When designing a program like this, it is important to avoid excessively fast fiscal consolidation and financial sector deleveraging. Going too fast would cause a large contraction in demand before the structural reforms that are aimed at boosting the economy’s growth potential...