BBC BLOGS - Gavin Hewitt's Europe

Archives for May 2011

A new home

Gavin Hewitt | 10:57 UK time, Thursday, 5 May 2011

Thank you for reading this blog over the past 20 months. As of today the Europe editor's blog is moving to a new home, with a fresh format. Visit my new page to see all of my expert analysis in one place - including my video, audio, news stories and [soon] my tweets. You can follow me here.

Portugal and the bail-out enigma

Gavin Hewitt | 11:22 UK time, Wednesday, 4 May 2011

Gradually the details are emerging of the EU's third bail-out deal. Portugal will be offered 78bn euros (£70bn) over three years. It is a substantial loan and higher than some expected.

A total of 12bn euros will be set aside to recapitalise the banks.

The most crucial detail missing is the interest rate that the IMF and EU will impose. The Republic of Ireland, among others, will be watching closely. That is likely to be set when Europe's finance ministers meet on 16 May.

Nor has it been revealed what reforms will be required. According to reports from Portugal, caretaker Prime Minister Jose Socrates has said there will be no cuts in public sector wages or the minimum wage. The most significant change may well be with structural reforms, shaking up a rigid and archaic system for hiring and firing.

There are other unknowns. Portugal's political parties, who are in the midst of an election, have yet to approve the plan, but they are expected to sign off on the agreement. However, if the reforms are seen as too severe Portugal's unions may take to the streets.

Finland's parliament may still put some obstacles in the road, after its voters registered strong resistance to financing bail-outs.

But the biggest question is the same one that remains unanswered with Greece and Ireland. A Portuguese official says the economy is likely to contract 2% in 2011 and in 2012. So when the loan period ends how will Portugal have reduced its overall debt?

Where will the growth come from that over the long term will take Portugal off the endangered list? While that question remains unanswered the talk of restructuring debt will not disappear.

The bail-out plan envisages 5.3bn euros in revenues from privatisations. Greece too is looking to raise a large tranche of money from privatisations. They have not yet happened and very much remain on the to-do list.

Interestingly the target for reducing the deficit this year is 5.9% of GDP. That is slightly easier than the current plan.

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