IMF Executive Board Approves an €26 Billion Extended Arrangement for PortugalPress Release No. 11/190
May 20, 2011
The Executive Board of the International Monetary Fund (IMF) today approved a three-year SDR 23.742 billion (about €26 billion) arrangement under the Extended Fund Facility for Portugal in support of the authorities’ economic adjustment and growth program. This front-loaded program makes SDR 5.6 billion (about €6.1 billion) immediately available to Portugal from the IMF. In 2011, total IMF financing will amount to about €12.6 billion and will be partnered with about €25.2 billion committed by the European Union.
The extended arrangement for Portugal, which is part of a cooperative package of financing with the European Union amounting to €78 billion over three years, entails exceptional access to IMF resources, amounting to 2,306 percent of Portugal’s IMF quota, and was approved under the IMF's fast-track Emergency Financing Mechanism procedures.
The financing package is designed to allow Portugal some breathing space from borrowing in the markets while it demonstrates implementation of the policy steps needed to get the economy back on track.
“The Portuguese authorities have put forward a program that is economically well-balanced and has growth and job creation at its center,” Acting Managing Director John Lipsky said. “It addresses the fundamental problem in Portugal – low growth – with a policy mix based on restoring competitiveness through structural reforms, ensuring a balanced fiscal consolidation path, and stabilizing the financial sector.”
“The authorities should be commended for this ambitious program that will involve sacrifices but that can lead to a stronger, more dynamic economy able to generate growth, jobs, and opportunity. The indication of support from the main political parties for the principal objectives and key policies indicates a cross-party resolve to tackle Portugal’s long-standing problems.” Mr. Lipsky added.
“The substantial financial support will help minimize the social costs of the adjustment. The program also includes a strong social safety net, by exempting lower categories of public wages and pensions from reduction, and by ensuring protection to the most vulnerable.
“The IMF, together with our European partners, is committed to support this national effort. Today's action by the IMF to support Portugal will contribute to the broad international effort underway to help bring stability to the Euro Area and secure recovery in the global economy,” Mr. Lipsky said.
Following the Executive Board’s action, Mr. Lipsky, as Acting Chair of the Board, said:
“The Portuguese economy faces a severe crisis as a result of a buildup of external and internal imbalances and deep-rooted structural problems that have engendered economic stagnation, lack of competitiveness and high unemployment. The authorities’ program aims at tackling these issues through an ambitious and comprehensive structural reform agenda, well balanced fiscal consolidation, and measures that will facilitate an orderly adjustment in private sector balance sheets.
“The fiscal consolidation plan under the program is ambitious but credible. The targeted fiscal path toward meeting the Excessive Deficit Procedure goal of 3 percent of GDP by 2013 strikes an appropriate balance between limiting the impact of fiscal adjustment on economic activity and restoring debt sustainability, while the most vulnerable segments of society remain protected. The plan will be supported by important fiscal reforms to streamline the functioning of the public sector and reduce fiscal risks.
“The financial sector component of the authorities’ program aims to promote market-based solutions to boost banks’ capital and restore confidence and access to wholesale market funding. To this end, the Bank of Portugal has already requested that banks raise their Core Tier 1 capital level to 9 percent by end-2011 and 10 percent by end-2012. Safeguards for capital and liquidity support are also provided under the program, helping ensure an orderly deleveraging of the economy and continued stability for Portugal’s financial system.
“Growth-enhancing policies are central to the program. A far-reaching structural reform program has been put into place to increase competition, reduce labor costs, and boost employment and productivity. Strong implementation of these reforms will be key to set the economy on a recovery path and improve market sentiment.”
Recent Economic Developments
Long-standing structural problems—including low productivity, weak competitiveness, and high debt—have severely undermined growth and given rise to large external and fiscal imbalances. While the government has made some efforts over the past year to bring the fiscal deficit under control and tackle structural impediments, the impact has not been sufficiently strong.
Fiscal improvement in 2010 was marginal, with corrective action delayed, in part reflecting a weak fiscal framework. As a result, the overall fiscal deficit declined only to 9.1 percent of GDP in 2010 from 10.1 percent in 2009. Moreover, the ambitious budget target of 4.6 percent of GDP for 2011 also fell out of reach.
Contagion and fiscal risks stoked funding pressures for the sovereign and banks. Government funding costs increased to post-euro record highs and distress in the sovereign debt market spilled over into the bank wholesale market. This caused a tightening in banks’ liquidity position as they lost access to wholesale funding markets, on which they were heavily reliant. In response to the increased funding strains and rising losses on banks’ loan portfolios, banks tightened lending policies and credit growth has slowed considerably.
Against this background, concerns over Portugal’s growth prospects and the sustainability of its external debt have intensified in recent months, culminating in a request for external financial assistance.
The program focuses on: structural reforms to boost growth and employment; an ambitious but balanced fiscal stabilization path, supported by structural fiscal reform; and safeguards to ensure financial stability and prevent a protracted credit contraction.
The main elements of the program are as follows:
Growth-enhancing reforms. A bold structural reform agenda focused on increasing competition, reducing labor costs, and boosting employment and productivity. The reform package will be key to improving the economy’s growth prospects and to restoring debt sustainability.
Restoring confidence and fiscal sustainability. An ambitious and credible fiscal consolidation plan that strikes a balance between ensuring debt sustainability and limiting the adverse impact of adjustment on growth. The fiscal objectives will be supported by important structural fiscal reforms to streamline the functioning of the public sector and reduce fiscal risks.
Safeguarding financial stability. An increase in the capital positions of banks through market-based solutions will be supported, as needed, by a fully funded capital backstop facility. Safeguards to support adequate banking system liquidity and for strengthening the supervisory and regulatory framework are also embedded in the program. Together these measures should help achieve an orderly deleveraging of private sector balance sheets and preserve financial sector stability.
Large external financing assistance under the program will help the transition and re-establish much-needed policy credibility. Major political parties have publicly supported the main elements of the program.