Revealed: the Portuguese agreement | FT Alphaville

Revealed: the Portuguese agreement

A great scoop from the Portuguese newspaper Expresso — they’ve managed to get a copy of the draft memorandum of understanding between Portugal and the EU/IMF/ECB, as part of its three-year bailout.

You won’t find the total cost of the bailout or its interest rate here, but there’s much fine detail on the balance of austerity.

Click to read:

This thing lists the various fiscal conditions Portugal has to fulfil before 2014, as well as strictures on its banks and state-backed companies.

Updates to follow as we trawl through it…

Update — First, it’s well worth comparing the document above with the latest version of the Irish programme and the technical MoU there. In Portugal’s edition, there are lots and lots of juicy details on state-owned companies, and some carefully calibrated compromises on austerity, in particular.

Some interesting features, sorted by sector:

1. The core fiscal targets

Generally already leaked but nice to have on paper. A brief summary:

Reduce the Government deficit to below EUR 10,068 million (equivalent to 5.9% of GDP based on current projections) in 2011, EUR 7,645 million (4.5% of GDP) in 2012 and EUR 5,224 million (3.0% of GDP) in 2013 by means of high-quality permanent measures and minimising the impact of consolidation on vulnerable groups; bring the government debt-toGDP ratio on a downward path as of 2013; maintain fiscal consolidation over the medium term up to a balanced budgetary position, notably by containing expenditure growth; support competitiveness by means of a budget-neutral adjustment of the tax structure.

2. Portuguese banks

Capital targets and recapitalisation costs already leaked. This wasn’t though, and could sway the bailout total quite a bit:

Subject to approval under EU competition rules, the authorities are committed to facilitate the issuance of government guaranteed bank bonds for an amount of up to EUR 35 billion, including the existing package of support measures.

There’s also the by now usual combination of measures on bank deleveraging, capital, and data quality:

Banco de Portugal (BdP) and the ECB, in consultation with the European Commission (EC) and the IMF, will include clear periodic target leverage ratios and will ask banks to devise by end-June 2011 institution-specific medium-term funding plans to achieve a stable market-based funding position…

BdP will direct all banking groups supervised by BdP to reach a core Tier 1 capital ratio of 9 percent by end-2011 and 10 percent at the latest by end-2012 and maintain it thereafter. If needed, using its Pillar 2 powers, the BdP will also require some banks, based on their specific risk profile, to reach these higher capital levels on an accelerated schedule, taking into account the indications of the solvency assessment framework described below. Banks will be required to present plans to BdP by end of June 2011 on how they intend to reach the new capital requirements through market solutions.

In the event that banks cannot reach the targets on time, ensuring higher capital standards might temporarily require public provision of equity for the private banks. To that effect, the authorities will augment the bank solvency support facility, in line with EU state aid rules, with resources of up to EUR 12 billion provided under the programme…

BdP will ensure by the end of September 2011 that the disclosure of non-performing loans will be improved by adding a new ratio aligned with international practices to the current ratio that covers only overdue loan payments. BdP will intensify on-site inspections and verification of data accuracy with technical assistance from the IMF, in the context of the data verification exercise for the new solvency assessment framework…

Lastly, provisions for what is effectively a fire sale of a lender rescued by the government back in 2008:

The authorities are launching a process to sell Banco Português de Negócios (BPN) on an accelerated schedule and without a minimum price. To this end, a new plan is submitted to the EC for approval under competition rules. The target is to find a buyer by the end of July 2011 at the latest…

3. Contingent liabilities and privatisation

Lots here, starting with public-private partnerships (one good example here is Portugal’s toll motorways).

Approve a standard definition of contingent liabilities. [Q2-2011]

The Government will recruit a top tier international accounting firm to undertake a more detailed study of PPPs in consultation with INE and the Ministry of Finance. The review will identify and, where practicable, quantify major contingent liabilities and any related amounts that may be payable by the Government. It will assess the probability of any payments by Government in relation to the contingent liabilities and quantify such amounts.

The Government will accelerate its privatisation programme. The existing plan, elaborated through 2013, covers transport (Aeroportos de Portugal, TAP, and freight branch of CP), energy (GALP, EDP, and REN), communications (Correios de Portugal), and insurance (Caixa Seguros), as well as a number of smaller firms. The plan targets front-loaded proceeds of about €[5.5] billion through the end of the program, with only partial divestment envisaged for all large firms. The Government commits to go even further, by pursuing a rapid full divestment of public sector shares in EDP and REN, and is hopeful that market conditions will permit sale of these two companies, as well as of TAP, by the end of 2011. The Government will identify, by the time of the second review, two additional large enterprises for privatisation by end-2012. An updated privatisation plan will be prepared by March 2012.

(A lesson learned here from the slow pace of Greek progress on privatisation?)

Update — Separate from the financial stuff above, the reforms to Portugal’s unemployment and wage laws get to the heart of the competitiveness problem facing the country’s economy. Looks like there’s plenty of delicate compromise and highly studied vagueness throughout these bits of the MoU:

The Government will prepare by Q4-2011 an action plan to reform along the following lines the unemployment insurance system, with a view to reduce the risk of long-term unemployment and strengthen social safety nets:

i. reducing the maximum duration of unemployment insurance benefits to no more than 18 months. The reform will not concern those currently unemployed and will not reduce accrued-to-date rights of employees;…

The Government will promote wage developments consistent with the objectives of fostering job creation and improving firms’ competitiveness with a view to correct macroeconomic imbalances. To that purpose, the Government will:

i. commit that, over the programme period, any increase in the minimum wage will take place only if justified by economic and labour market developments and agreed in the framework of the programme review;…

And it goes on and on, right down to property taxation:

The Government will modify property taxation with a view to level incentives for renting versus acquiring housing. [Q4-2011] In particular, the Government will: i) limit income tax deductibility of rents and mortgage interest payments as of 01.01.2012, except for low income households. Principal payments will not be deductible as of 01.01.2012…

Happy reading.

Related links:
Portugal plan earmarks €12bn for banks – FT
Portugal, sell your gold! – FT Alphaville