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Economic Adjustment Programme for Portugal

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The Economic Adjustment Programme for Portugal, usually referred to as the Bailout programme, is a Memorandum of understanding on financial assistance to the Portuguese Republic in order to cope with the 2010–14 Portuguese financial crisis.

The three-year programme was signed in May 2011 by the Portuguese Government under then-Prime Minister José Sócrates of the Socialist Party (PS) on one hand, and on the other hand by the European Commission on behalf of the Eurogroup, the European Central Bank (ECB) and the International Monetary Fund (IMF).

In June 2014, under the leadership of then-Prime Minister Pedro Passos Coelho of the Social Democratic Party (PSD),[1] Portugal exited the €78 billion programme, with a concluding tranche of €0.4 billion being disbursed in November 2014.

Background

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Main article: 2010–14 Portuguese financial crisis

On 6 April 2011, the resigning Prime Minister José Sócrates of the Socialist Party (PS) announced on television[2] that the country, facing a status of bankruptcy, would request financial assistance to the IMF (at the time managed by Dominique Strauss-Kahn) and the European Financial Stability Facility, like Greece and the Republic of Ireland had done before.

A set of reputed economists (including former Prime Minister and eventual President Aníbal Cavaco Silva) pointed out to a rigid labor market, overstaffing in the public sector and the excessive size of the Portuguese government whose total expenditures overtook 45% of the GDP in 2005.

On the other hand, Robert Fishman, in The New York Times article "Portugal's Unnecessary Bailout", points out that Portugal fell victim to successive waves of speculation by pressure from bond traders, rating agencies and speculators.[3] In the first quarter of 2010, before pressure from the markets, Portugal had one of the best rates of economic recovery in the EU. From the perspective of Portugal's industrial orders, exports, entrepreneurial innovation and high-school achievement, the country matched or even surpassed its neighbors in Western Europe.[3] Productivity and purchasing power remained, however, among the lowest in the European Union.[4][5][6]

The causes for the low level of labor productivity in Portugal by 2011 have been attributed to a rigid labor market, a labor movement-inspired legal framework, an overstaffed public sector including the Portuguese civil service, and a low rate of high school (secondary education) graduates, which when put together led to great misallocation of factors of production.[7]

Memorandum of Understanding

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On 16 May 2011, the eurozone leaders officially approved a €78 billion bailout package for Portugal, which became the third eurozone country, after Ireland and Greece, to receive emergency funds. The bailout loan was equally split between the European Financial Stabilisation Mechanism, the European Financial Stability Facility, and the International Monetary Fund.[8] According to the Portuguese finance minister, the average interest rate on the bailout loan is expected to be 5.1 percent.[9] As part of the deal, the country agreed to cut its budget deficit from 9.8 percent of GDP in 2010 to 5.9 percent in 2011, 4.5 percent in 2012 and 3 percent in 2013.[10]

In June 2011, Portugal officially requested the €78 billion IMF-EU bailout package in a bid to stabilise its public finances.[11]

To avoid the legislative ratification procedures required for treaties under the international law, the programme was set up as an intergovernmental agreement consisting of:

  • the Memorandum of Economic and Financial Policies (MEFP),
  • the Memorandum of Understanding on Specific Economic Policy Conditionality (MoU),
  • and the Technical Memorandum of Understanding (TMU), the actual Loan Facility Agreement.

The agreements were signed in June 2011 by the Portuguese government and the European Commission.[12] Portugal and the IMF already had a long history before the 2011 bailout with the past IMF rescue packages to the Portuguese Republic in 1977 and 1983.[13]

Further events

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In order to accomplish the European Union/IMF-led rescue plan for Portugal's sovereign debt crisis, in July and August 2011 the new government led by Pedro Passos Coelho announced it was going to cut on state spending and increase austerity measures, including public servant wage cuts and additional tax increases.

On 6 July 2011, the ratings agency Moody's had cut Portugal's credit rating to junk status, Moody's also launched speculation that Portugal could follow Greece in requesting a second bailout.[14]

After the bailout was announced, the Portuguese government headed by Pedro Passos Coelho managed to implement measures to improve the State's financial situation, including tax hikes, a freeze of civil service-related lower-wages and cuts of higher-wages by 14.3%, on top of the government's spending cuts. The Portuguese government also agreed to eliminate its golden share in Portugal Telecom which gave it veto power over vital decisions.[15][16] In 2012, all public servants had already seen an average wage cut of 20% relative to their 2010 baseline, with cuts reaching 25% for those earning more than 1,500 euro per month. This led to a flood of specialized technicians and top officials leaving the public service, many looking for better positions in the private sector or in other European countries.[17]

November 2011 protests against austerity measures of the Economic Adjustment Programme for Portugal outside the Assembly of the Republic

In December 2011, it was reported that Portugal's estimated budget deficit of 4.5 percent in 2011 would be substantially lower than expected, due to a one-off transfer of pension funds. The country would therefore meet its 2012 target a year earlier than expected.[10] Despite the fact that the economy is expected to contract by 3 percent in 2011 the IMF expects the country to be able to return to medium and long-term debt sovereign markets by late 2013.[18] Any deficit means increasing the nation's debt. To bring down the debt to sustainable levels will require a 10% budget surplus for several years according to some estimates.[19]

In the following months the country started to be seen as moving on the right track. However, the unemployment level rose to over 15 percent in the second quarter 2012 and it was expected to rise even further in the near future.[20]

On 7 June 2012, Portugal's largest listed bank by assets, Millennium BCP, was rescued by the Portuguese Government headed by Passos Coelho, through 3 billion euros ($3.8 billion) in state funds it took from the country's bailout package.[21]

In January 2013, the European Commission approved, under EU state aid rules, a rescuing recapitalisation totalling €1.1 billion granted by Portugal to Banco Internacional do Funchal S.A. (Banif) for reasons of financial stability. The Portuguese Republic committed to provide a far-reaching restructuring plan for Banif by 31 March 2013.[22]

On 3 August 2014, Banco Espírito Santo, at the time the largest listed bank in Portugal, was rescued by the State. The bank was subject to a resolution measure and split in two: Novo Banco, which kept its healthy operations ("good bank"), while the toxic assets remained in the existing bank ("bad bank") which entered into liquidation in 13 July 2016.[23][24] Novo Banco received a €4.9 billion bailout to be recapitalized, funded by the Portuguese Resolution Fund, to which the Portuguese government lent €3.9 billion.[25]

See also

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References

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  1. ^ Portugal, Rádio e Televisão de (4 May 2014). "Passos Coelho anuncia saída limpa do programa da troika". Passos Coelho anuncia saída limpa do programa da troika (in Portuguese). Retrieved 15 September 2023.
  2. ^ Portugal pede ajuda para resgate da dívida sobrerana, Euronews (April 7th, 2011) https://www.youtube.com/watch?v=IWvfH6aofNc
  3. ^ a b Fishman, Robert (12 April 2011). "Portugal's Unnecessary Bailout". The New York Times. Retrieved 6 January 2015.
  4. ^ Productivity in Portugal: magic ingredient or main course?, CaixaBank Research (March 15th, 2022) https://www.caixabankresearch.com/en/economics-markets/activity-growth/productivity-portugal-magic-ingredient-or-main-course
  5. ^ Portugal é o 7º país da UE que gera menos riqueza por cada hora de trabalho, Instituto Mais Liberdade (October 27th, 2021) https://maisliberdade.pt/maisfactos/portugal-e-o-7-pais-da-ue-que-gera-menos-riqueza-por-cada-hora-de-trabalho/
  6. ^ Portugal foi ultrapassado por (mais) duas economias de leste em 2021, Instituto Mais Liberdade (March 24th, 2022) https://maisliberdade.pt/maisfactos/portugal-foi-ultrapassado-por-2-economias-de-leste-em-2021-a-economia-portuguesa-recuou-3-lugares-no-eurosat-em-apenas-6-anos/
  7. ^ Misallocation and productivity in the lead up to the Eurozone crisis, Banco de Portugal https://www.bportugal.pt/paper/misallocation-and-productivity-lead-eurozone-crisis
  8. ^ Gavin Hewitt (16 May 2011). "Portugal's 78bn euro bail-out is formally approved". bbc.co.uk. Retrieved 16 May 2012.
  9. ^ Winning, Nicholas (16 May 2011). "Portugal Fin Min: Average Rate On EU/IMF Loan Is Around 5.1%". jp.advfn.com. Retrieved 6 June 2012.
  10. ^ a b "Portugal 2011 deficit to beat goal on one-off revs-PM". Reuters UK. 13 December 2011. Archived from the original on 1 January 2016. Retrieved 30 December 2011.
  11. ^ "Portugal requests bailout". The Christian Science Monitor. Retrieved 30 June 2012.
  12. ^ "As 50 medidas de austeridade entre junho de 2011 e agosto deste ano". Jornal Expresso (in European Portuguese). Retrieved 20 June 2023.
  13. ^ "As intervenções do FMI em Portugal". RTP Ensina (in European Portuguese). Retrieved 20 June 2023.
  14. ^ "Portugal's credit rating slashed", Business Spectator, 6 July 2011
  15. ^ Kowsmann, Patricia, "Portugal govt ends golden-share holdings" (Paid content) Archived 31 October 2013 at the Wayback Machine, Dow Jones Newswires 5 July 2011.
  16. ^ "Portugal Government Ends Golden-Share Holdings". The Wall Street Journal. 5 July 2011. Retrieved 20 July 2011.
  17. ^ Institute of Management Technology Nagpur: "Eurocrisis", Okonomist, Vol.1, Issue 3, January 2012
  18. ^ "Good Progress But Testing Times Ahead For Portugal". IMF. 22 December 2011. Retrieved 30 December 2011.
  19. ^ Chip Krakoff (17 February 2012). "PIIGS To The Slaughter: After Greece, Portugal". Seeking Alpha. Retrieved 21 May 2012.
  20. ^ Portugal Q2 Unemployment Rate Rises To Record High, RTTNews (14 August 2012)
  21. ^ Portugal's BCP says to start repaying state funds early, Reuters (7 June 2012)
  22. ^ EC approves Banif rescue recapitalisation Archived 4 March 2016 at the Wayback Machine, theportugalnews.com (24 January 2013)
  23. ^ Gonçalves, Sérgio (4 August 2014). "Portugal in 4.9 billion euro rescue of Banco Espirito Santo". Reuters. Archived from the original on 2 May 2024. Retrieved 4 August 2014.
  24. ^ Comissão Liquidatária do Banco Espírito Santo (28 July 2016). "MENSAGEM DA COMISSÃO LIQUIDATÁRIA". Banco Espírito Santo (in Portuguese). Archived from the original on 8 March 2023. Retrieved 2 May 2024.
  25. ^ "Financiamento de medidas de resolução" [Financing of resolution measures]. Fundo de Resolução (in Portuguese). Archived from the original on 4 December 2023. Retrieved 2 May 2024.

Literature

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