Portugal has been approved a €26 billion loan by the International Monetary Fund (IMF) to help the country tide over a devastating sovereign debt crisis, said the IMF adding that it will immediately release €6.1 billion to ease investor concern over a possible default.
In a statement issued yesterday, the IMF said total disbursement to Portugal in the current financial year will include about €12.6 billion from IMF and €25.2 billion from the European Union. The funding is part of the total EU/IMF €78 billion bailout package approved for Portugal.
“The financing package is designed to allow Portugal some breathing space from borrowing in the markets while it demonstrates implementation of the policy steps needed to get the economy back on track”, said the IMF in the statement.
IMF Mission Chief Poul Thomsen said the loan has been approved to help Potugal stay out of the medium to long term bond market for a little over two years.
Lisbon also needs to carry out deep reforms of its labour and justice system, raise taxes, cut government spending and start off with sweeping privatization schemes.
“The Portuguese authorities have put forward a program that is economically well-balanced and has growth and job creation at its centre”, said acting managing director of IMF John Lipsky.
“It addresses the fundamental problem in Portugal — low growth — with a policy mix based on restoring competitiveness through structural reforms, ensuring a balanced fiscal consolidation path, and stabilizing the financial sector, added Mr. Lipsky.
The Portuguese economy is expected to shrink by 2 percent in 2011 and 2012 because of the sweeping changes. Pedro Passos Coelho, Leader of Portugal’s opposition Social Democrats cautioned on Thursday that the country does not have too many options. Portugal is the first country to request private investors not to sell bond holdings on voluntary basis for the next two years.
“This is not going to be an easy program. There is going to be a difficult period of adjustment”, said Thomsen adding “Even during the good years, before the crisis, Portugal was hardly growing”.
He said the economic reforms should show results in the next two years and the country expects to bring budget deficit down to 3 percent of GDP by 2013.
He lauded the political support the austerity drives have generated saying: “It’s quite striking how most of the key issues, not least on the structural reform side, have broad political support, which to me is one of the encouraging things”.
This will help reshape Portuguese economy, he concluded.