Portugal’s Path to Regain Full Market Access Is Narrow, IMF Says

Portugal’s ability to regain full market access after its aid plan ends is limited and support from European partners will remain important to assure medium term financing needs, the International Monetary Fund said.

“Implementation risks are high and the increased uncertainty has narrowed the path to full market access by the end of the program” in June, the Washington-based lender said today in a staff report about the eighth and ninth reviews of Portugal’s bailout. “The political fallout in July, followed by new adverse Constitutional Court rulings, has delayed the authorities’ pre-financing plans for 2014.”

Squabbles over budget policy in Portugal, which is exiting a 78 billion-euro ($105 billion) rescue plan from the European Union and the IMF in 2014, led to an increase in Portuguese borrowing costs earlier this year. Yields on its 10-year bonds breached 8 percent on July 3, after easing to 5.23 percent in May, the lowest since 2010. Since then, yields have relaxed and were at 5.9 percent today. That still compares with 3.6 percent for Ireland, scheduled to end its bailout before Portugal.

European Support

“The path is wider than a month ago,” Subir Lall, head of the IMF’s mission to Portugal said in a call with reporters. “So there is a path to market access,” he said, adding that it’s too premature to speculate on whether the country will need more aid after the program ends.

Should access to the bond market remain constrained, Portugal can resort to bond exchanges and purchases of bonds by the social security fund, the IMF said, adding that it sees prospects of covering financing needs over the next 12 months as reasonable.

“Nonetheless, support from European partners will remain important to help assuage medium-term financing challenges,” it said in the report. “Should market uncertainty persist despite successful completion of the next few program reviews, they could be called upon to fulfill their commitment to support Portugal.”

The IMF sees significant downside risks to fulfilling the program’s objectives, particularly as some of the measures included in the government’s 2014 budget may be blocked by the country’s Constitutional Court. “Political determination to sustain the fiscal consolidation effort is therefore paramount,” it said.

Spending Cuts

Part of the 3.2 billion euros of spending cuts included in the 2014 budget plan will probably be scrutinized by the Constitutional Court in Lisbon, the country’s highest judicial body, after the measures are passed in parliament this month. Judges already blocked austerity measures including pay cuts for state workers on three separate occasions this year.

Any alternative measures would be “a second-best option,” IMF’s Lall said.

While the economy may pick up next year, Prime Minister Pedro Passos Coelho still has to trim spending after relying mainly on tax increases this year to meet targets set in the European Union-led rescue program.

“Improved near-term economic outlook should not distract from the need to advance structural reforms forcefully to underpin a sustainable recovery,” the IMF said.

The government expects the economy to grow 0.8 percent next year, after contracting 1.8 percent in 2013. It sees the unemployment rate at 17.4 percent this year and 17.7 percent in 2014.

Portugal’s economy probably grew 0.3 percent in the third quarter, when the country’s jobless rate dropped to 15.6 percent, according to the median of 6 estimates in a Bloomberg survey. In the three months through June, gross domestic product expanded for the first time since 2010 as export growth accelerated.

The completion of the eighth and ninth bailout reviews allows the disbursement of about 1.9 billion euros to Portugal.

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