EU-IMF experts praise Portugal, warn of risks from recession

(LISBON) - Portugal is meeting debt-rescue targets and could be strong enough to borrow on financial markets next year but is in a deeper recession than thought, EU and IMF auditors said on Tuesday.

The economy is now set to shrink by 3.25 percent this year, they said, pointing to a worse recession than expected so far with contraction forecast to be 3.0 percent.

There is a resurgence of concern on financial markets that Portugal is near a danger zone of possibly needing a second round of rescue help from the EU and IMF, and that Spain is also at risk of needing help.

But the creditors commended the Portuguese government for having cut the budget deficit to 4.2 percent of GDP, sharper than a 5.9 percent target.

Portugal still faces risks, the experts from the European Union, The European Central Bank and the International Monetary Fund, warned.

Portugal last year became the third eurozone country after Greece and Ireland to be bailed out, receiving an EU-IMF package worth up to 78 billion euros in return for a commitment to reform its economy and impose austerity measures.

Since the beginning of the year and particularly in the last month, tensions over the eurozone debt crisis have eased, largely because of progress by the eurozone in increasing emergency funding if further bailouts are needed.

"Overall, the programme is on track. But important risks and challenges remain," the European Commission said in a report based on the latest assessments of Portugal by the troika, conducted in late February.

The report said: "Noticeable progress has been made in the area of structural reforms. The far-reaching and ambitious reform agenda is on track in the areas of labour market, health care, housing, judiciary and the insolvency and regulatory framework including competition. Also, privatisations so far have been highly successful."

The auditors said that economic conditions in Portugal had worsened markedly towards the end of last year and that there was concern about a weakening of the external trade balance.

The tough reforms and unprecedented action to correct public finances have put the country in deep recession.

Some analysts believe Portugal could be unable to return to the markets as planned by September 2013, and so have to seek additional help.

Portugal is to test the bond markets on Wednesday with an issue of 18-month debt, the longest maturity it has tested since being rescued.

"For the time being, our assumption is that the programme is on track and should lead Portugal to regain market access in 2013," said Peter Weiss, the commission's deputy head of mission in Portugal.

He said, speaking at a Brussels press conference, that there "are signs that financial markets are slowly gaining trust in the programme".

He said: "Our assumption is that the programme is enough. The programme as such is very ambitious and we don't believe the government can do more than what is in the programme.

"If this performance continues there is no reason to believe that this programme is not enough."

But he also observed: "There are elements which are not in the hands of the Portuguese government and may lead to a situation which is not foreseen."

The creditors noted that "economic sentiment worsened markedly" in the fourth quarter of 2011, with "unemployment rising sharply and business confidence reaching record lows on the back of weakening external trade".

According to the lenders, the main challenge for the government of Prime Minister Pedro Passos Coelho will be to bring down the unemployment rate, which official forecasts say will exceed 15 percent at the end of the year.