Portugal Must Keep Fiscal Consolidation After Bailout, EU Says

Portugal must continue fiscal consolidation and structural reforms after it exits its bailout to ensure debt sustainability, the European Commission said.

“The ratio of public debt to gross domestic product remains high but is sustainable provided reform efforts continue over the program horizon and beyond,” the commission said in documents sent by the Finance Ministry in Berlin to German lawmakers. “Additional fiscal consolidation beyond the program horizon would clearly accelerate the debt-reduction path.”

Simon O’Connor, a spokesman for European Union Economic and Monetary Affairs Commissioner Olli Rehn, declined to comment on the documents when contacted by phone today. The German Finance Ministry didn’t immediately respond when contacted for comment.

Prime Minister Pedro Passos Coelho’s government budget for 2014 is relying on 3.2 billion euros ($4.4 billion) of spending cuts to meet deficit targets as Portugal prepares its exit from an EU-led bailout program in the middle of May. Permanent fiscal consolidation measures of about 1.2 percent of GDP will be necessary to reach the 2.5 percent deficit target in 2015 under the current macroeconomic scenario, the documents show.

While Portugal’s debt ratio will decline gradually after having peaked at 129.4 percent of GDP in 2013, a “solid reduction path crucially hinges on medium and long-term economic growth” that needs to be preserved by implementing structural reforms, according to the commission, the EU’s executive arm. The reduction is “only attainable if fiscal responsibility is maintained also after the end of the program period,” it said.

Economic Growth

Portuguese growth may exceed 1 percent in 2014 after the country emerged from its worst recession in at least 25 years in the second quarter of 2013, Economy Minister Antonio Pires de Lima said last month. Although indicators suggest the recovery is becoming more entrenched, the outlook for the economy remains fragile, the commission said.

The country’s adjustment is “broadly on track” and “Portuguese authorities remain determined to achieve the objectives of the program,” it said. That determination has been “rewarded” by falling yields on Portuguese debt, it said.

Portugal’s 10-year yield dropped to 4.92 percent on Feb. 3, the lowest since June 2010. It reached more than 18 percent in January 2012 amid concern the nation would struggle to service its debt as Europe’s financial woes roiled bond markets.

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