Dear Portugal, You Get a Bail Out and a Recession

Portugal is getting an IMF, EU, ECB crafted bail out of €78 billion where the austerity terms will throw them into recession.

Portugal's main opposition party met European and IMF officials on Wednesday and said they would consider whether to back a 78-billion-euro bailout after a source said the terms would propel the economy into two years of recession.

Why would the opposing party say that? The IMF is requiring Portugal to enact draconian cuts to the deficit, 9.1% to 5.9% of GDP in 2011 and less than a 3% GDP to debt ratio by 2013. The Guardian:

Health and education spending will be cut by €745m, civil service pay and pensions will be frozen, and people on state pensions above €1,500 a month will have them reduced.

Civil service staffing is to be squeezed by 1% a year in central government, while regional administrations and town halls will be told to shed 2% of their employees annually.

Banks will get €12 billion of the bail out. Earlier Banco Português de Negócios was nationalized, so the bail out requires Portugal to sell it at a greatly reduced price. In fact there is no minimum price specified.

Portugal is expected to reduce public spending by 3.4% of its GDP this year and raise an extra 1.7% of GDP by raising taxes on cars, tobacco and electricity and getting rid of income and corporation tax loopholes.

The bail out caused Portugal's bond yields to spread, costing them more money to finance their debt.

Portugal successfully auctioned €1.1bn of three-month government bonds on Wednesday morning, slightly more than it was expected to sell. However the yield, or interest rate, on the debt rose to 4.652%, up from 4% in a similar auction.

The yield on its 10-year debt fell on Wednesday, in response to the bailout deal, to around 10.06%. This level is still generally seen as unsustainable, and is also several percentage points higher than the interest rates levied on Ireland and Greece's own rescue deals.


The main threat is that stresses on banks rise and loan losses will swell as the economy worsens and margins shrink, which would depress earnings and add to the amount they need, especially if there is a prolonged recession.

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