Press Release: IMF Executive Board Approves an €26 Billion Extended Arrangement for Portugal

IMF News, May 20, 2011

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Canonical URL: Press Release: IMF Executive Board Approves an €26 Billion Extended Arrangement for Portugal

Executive Board 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.
The arrangement is front-loaded, making 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 is part of a cooperative package of financing with the European Union amounting to €78 billion over three years.
The arrangement 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.

SDR 23.742 billion (about €26 billion): total size of the three-year Extended Fund Facility arrangement.
SDR 5.6 billion (about €6.1 billion): immediately available disbursement (front-loaded).
2011 IMF financing: about €12.6 billion.
European Union commitment in 2011: about €25.2 billion.
Cooperative EU–IMF financing package: €78 billion over three years.
Exceptional access level: 2,306 percent of Portugal’s IMF quota.
Approved under: IMF's fast-track Emergency Financing Mechanism procedures.

Main aim: support the authorities’ economic adjustment and growth program and provide breathing space from borrowing in the markets while policy implementation proceeds.
Policy mix emphasized by Acting Managing Director John Lipsky:
- restoring competitiveness through structural reforms;
- ensuring a balanced fiscal consolidation path;
- stabilizing the financial sector.
Cross-party political support for principal objectives and key policies noted as important for program credibility.

Program centers growth and job creation by addressing low growth via:
- a far-reaching structural reform agenda to increase competition;
- measures to reduce labor costs;
- policies to boost employment and productivity.
Strong implementation of these reforms is described as key to set the economy on a recovery path and improve market sentiment.

Fiscal consolidation described as ambitious but credible.
Targeted fiscal path toward meeting the Excessive Deficit Procedure goal of 3 percent of GDP by 2013.
Fiscal consolidation balances limiting impact on economic activity and restoring debt sustainability while protecting the most vulnerable.
Fiscal reforms to streamline public sector functioning and reduce fiscal risks will support the plan.

Financial sector component aims to promote market-based solutions to boost banks’ capital and restore confidence and access to wholesale market funding.
Bank of Portugal request: raise Core Tier 1 capital level to 9 percent by end-2011 and 10 percent by end-2012.
Program provides safeguards for capital and liquidity support and includes a fully funded capital backstop facility, as needed.
Measures to support adequate banking system liquidity and to strengthen supervisory and regulatory framework are embedded to help ensure orderly deleveraging and preserve financial stability.

Long-standing structural problems undermining growth: low productivity, weak competitiveness, and high debt.
Fiscal deterioration and delays in corrective action:
- overall fiscal deficit declined to 9.1 percent of GDP in 2010 from 10.1 percent in 2009.
- ambitious budget target of 4.6 percent of GDP for 2011 fell out of reach.
Contagion and fiscal risks increased funding pressures for sovereign and banks; government funding costs rose to post-euro record highs.
Distress in sovereign debt market spilled over into the bank wholesale market, tightening banks’ liquidity and causing loss of wholesale funding access.
Banks tightened lending policies and credit growth slowed considerably.
These developments culminated in a request for external financial assistance.

Growth-enhancing reforms:
- bold structural reform agenda focused on increasing competition, reducing labor costs, and boosting employment and productivity.
Restoring confidence and fiscal sustainability:
- ambitious and credible fiscal consolidation plan supported by structural fiscal reforms to streamline public sector functioning and reduce fiscal risks.
Safeguarding financial stability:
- increase in banks’ capital positions through market-based solutions, supported as needed by a fully funded capital backstop facility;
- safeguards for banking system liquidity and strengthened supervisory and regulatory framework to enable orderly deleveraging.
Large external financing assistance intended to aid transition and re-establish policy credibility.
Major political parties have publicly supported the main elements of the program.

Press Release No. 11/190, May 20, 2011, International Monetary Fund