Monday, September 26, 2011

Portugal Expected To Receive €3.98 Billion Disbursement from IMF

BBC: Portugal Bail-out
CBS Money Watch: Portugal to get More Bail Out Funds
ECB: Statement by the European Commission, ECB and IMF on the first review mission to Portugal
IMF: IMF Completes First Review Under an EFF with Portugal
IMF: Executive Board Approves an €26 Billion Extended Arrangement for Portugal

On September 12, the Executive Board of the International Monetary Fund (IMF) completed the first review of Portugal’s performance under a three year, €78 billion, bailout agreement reached earlier this year. The successful completion of the review allows Portugal to immediately receive a €3.98 billion disbursement from the bailout fund, bringing total disbursements under the agreement to €10.43 billion.

One of the main reasons for Portugal’s financial trouble is that the country’s economy has not grown fast-enough to keep up with the government’s spending. As a result, the government has had to take on a great deal of debt to continue providing the services its citizens have come to expect. As the financial crisis worsened, interest rates on Portuguese bonds increased due to investors’ fears that Portugal was taking on too much debt, which made it more expensive for Portugal to continue borrowing money. Eventually, interest rates increased so much that Portugal needed external financial support to pay its debts—a bailout.

Under the bailout agreement, approved on May 20, 2011, the IMF and other European countries agreed to lend Portugal €78 billion on the condition that it make specific dramatic economic reforms within the next year and a half to address the country’s debt. The reforms, which include forcing banks to increase cash reserves and reducing government payroll costs, are meant to improve competitiveness and put Portugal’s economy on a path toward sustainable growth. In its first review of the country’s austerity program, the IMF stated that the country is on track to meet its fiscal target of reducing the budget deficit to 3% of gross domestic product (GDP) by 2013. The IMF also expects economic growth and inflation to remain in line with its conditions.

The review committee noted that Portuguese banks have been successful in increasing their capital (cash) reserves to meet the new capital adequacy requirements, and that the Portuguese government has made progress in strengthening its supervisory and regulatory framework over the financial sector. Nevertheless, the success of the IMF program is greatly dependent on the government’s ability to address another one of Portugal’s main problems—lack of competitiveness—by opening the economy to competition. To do so, the government has so far eliminated the special rights (shares) it holds in private companies to reduce government involvement in the private sector, which helps level the economic playing field. While the reforms appear promising so far, Portugal still faces more difficulties. The review committee made it clear that Portugal has not yet done enough to ensure the future stability of its debt.

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