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The EU, ECB and IMF ‘troika’ of Portugal’s creditors on Friday gave the green light for an 11.5 billion euro second tranche of aid as part of Portugal’s debt bailout plan.
“The programme is in our view on track,” the three said in a statement. “The approval of the conclusions of the current evaluation justifies the unblocking of the 11.5 billion euro ($16.4 billion) tranche.”
Portugal has already received 19.8 billion euros of its three-year 78-billion-euro bailout agreed in May.
The European Union, European Central Bank and International Monetary Fund statement comes as fears grow that the eurozone debt crisis, coupled with similar problems in the United States, could tip the world economy back into recession.
After snaring Greece, Ireland and Portugal, the crisis now threatens to engulf the Italy and Spain, the eurozones third- and fourth-largest economy.
Even France, the second largest eurozone economy after Germany, has felt the cold breath of markets on its neck and pledged to speed up deficit reduction.
The troika noted that prospects for Portugal have been enhanced by the July summit, with its eurozone partners who “most importantly stand ready to provide financing until market access has normalised.”
At the same time, new measures agreed last month by eurozone leaders at an emergency summit will help reduce its borrowing costs and aid repayment burden.
The three partners in the bailout said they now had confidence that Portugal could pull through under the current programme by maintaining strict budget discipline.
“We are fully confident that Portugal can return to the (financial) markets at the end of this programme,” Poul Thomsen, head of the IMF delegation, told a press conference.
But the “most difficult challenges are still ahead,” he added.
The ultimate aim of the EU-IMF bailouts is to stabilise public finances which should reduce the countries borrowing costs and thereby allow them to return to the markets to raise funding there as they had before the crisis erupted.
In return for the EU-IMF bailout, Portugal’s new centre-right Social Democrat party (PSD) agreed to slash spending and raise taxes to stabilise the public finances.
The troika said it was “confident” that its targets would be met and added: “Our overall assessment is very positive.”
Investors have been not been so reassured by the measures, unconvinced that they would help debt plagued single currency nations under financial duress find their way to long-term solvency.
The latest tranche of funds will probably be paid to Lisbon next month, after final agreement by eurozone finance ministers and the IMF board.
Portuguese Finance Minister Vitor Gaspar said “it is with satisfaction that I note the positive evaluation of the mission.
“The mission highlighted the government’s determination to implement the programme adopted in May,” he said.
The centre-right government has pledged to cut the public deficit to 5.9 percent of gross domestic product this year from 9.1 percent in 2010, and to three percent, the EU ceiling, in 2013.
“We are confident the deficit goal for this year will be met,” the IMF’s Thomsen said.
But austerity measures have taken a bite out of economic growth however, with the troika forecasting an economic contraction of 2.2 percent this year, 1.8 percent in 2012 and a return to growth in 2013.