The Economic Adjustment Programme for Portugal, usually referred to as the Bailout programme, is a Memorandum of understanding on financial assistance to the Portuguese Republic in order to cope with the 2010–14 Portuguese financial crisis. The three-year programme was signed in May 2011 by the

Portuguese Government Portuguese may refer to: * anything of, from, or related to the country and nation of Portugal ** Portuguese cuisine, traditional foods ** Portuguese language, a Romance language *** Portuguese dialects, variants of the Portuguese language ** Portu ...

under then-Prime Minister José Sócrates of the

Socialist Party Socialist Party is the name of many different political parties around the world. All of these parties claim to uphold some form of socialism, though they may have very different interpretations of what "socialism" means. Statistically, most of th ...

(PS) on one hand, and on the other hand by the

European Commission The European Commission (EC) is the primary Executive (government), executive arm of the European Union (EU). It operates as a cabinet government, with a number of European Commissioner, members of the Commission (directorial system, informall ...

on behalf of the

Eurogroup The Eurogroup is the recognised collective term for the informal meetings of the finance ministers of the eurozone—those member states of the European Union (EU) which have adopted the euro as their official currency. The group has 20 members ...

, the

European Central Bank The European Central Bank (ECB) is the central component of the Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's Big Four (banking)#International ...

(ECB) and the

International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution funded by 191 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of las ...

(IMF). In June 2014, under the leadership of then-Prime Minister

Pedro Passos Coelho Pedro Manuel Mamede Passos Coelho (; born 24 July 1964) is a Portuguese people, Portuguese politician and university guest lecturer who was the List of prime ministers of Portugal, 117th prime minister of Portugal, in office from 2011 to 201 ...

of the

Social Democratic Party The name Social Democratic Party or Social Democrats has been used by many political parties in various countries around the world. Such parties are most commonly aligned to social democracy as their political ideology. Active parties Form ...

(PSD), Portugal exited the €78 billion programme, with a concluding

tranche In structured finance, a tranche () is one of a number of related securities offered as part of the same transaction. In the financial sense of the word, each bond is a different slice of the deal's risk. Transaction documentation (see indent ...

of €0.4 billion being disbursed in November 2014.

Background

On 6 April 2011, the resigning Prime Minister José Sócrates of the

(PS) announced on television that the country, facing a status of bankruptcy, would request financial assistance to the

IMF The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution funded by 191 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of la ...

(at the time managed by Dominique Strauss-Kahn) and the European Financial Stability Facility, like Greece and Ireland had done before. A set of reputed economists (including former Prime Minister and eventual President

Aníbal Cavaco Silva Aníbal António Cavaco Silva (; born 15 July 1939) is a Portuguese economist and politician who served as the 19th president of Portugal, from 9 March 2006 to 9 March 2016, and as prime minister of Portugal, from 6 November 1985 to 25 October ...

) pointed out to a rigid labor market, overstaffing in the public sector and the excessive size of the Portuguese government whose total expenditures overtook 45% of the GDP in 2005. On the other hand, Robert Fishman, in ''The New York Times'' article "Portugal's Unnecessary Bailout", points out that Portugal fell victim to successive waves of speculation by pressure from bond traders, rating agencies and speculators. In the first quarter of 2010, before pressure from the markets, Portugal had one of the best rates of economic recovery in the EU. From the perspective of Portugal's industrial orders, exports, entrepreneurial innovation and high-school achievement, the country matched or even surpassed its neighbors in Western Europe. Productivity and purchasing power remained, however, among the lowest in the

European Union The European Union (EU) is a supranational union, supranational political union, political and economic union of Member state of the European Union, member states that are Geography of the European Union, located primarily in Europe. The u ...

. The causes for the low level of

labor productivity Workforce productivity is the amount of goods and services that a group of workers produce in a given amount of time. It is one of several types of productivity that economists measure. Workforce productivity, often referred to as labor produc ...

in Portugal by 2011 have been attributed to a rigid labor market, a labor movement-inspired legal framework, an overstaffed public sector including the Portuguese civil service, and a low rate of high school (secondary education) graduates, which when put together led to great misallocation of factors of production.

Memorandum of Understanding

On 16 May 2011, the eurozone leaders officially approved a bailout package for Portugal, which became the third eurozone country, after Ireland and Greece, to receive emergency funds. The bailout loan was equally split between the European Financial Stabilisation Mechanism, the European Financial Stability Facility, and the

. According to the Portuguese finance minister, the average interest rate on the bailout loan is expected to be 5.1 percent. As part of the deal, the country agreed to cut its budget deficit from 9.8 percent of GDP in 2010 to 5.9 percent in 2011, 4.5 percent in 2012 and 3 percent in 2013. In June 2011, Portugal officially requested the €78 billion IMF-EU bailout package in a bid to stabilise its public finances. To avoid the legislative

ratification Ratification is a principal's legal confirmation of an act of its agent. In international law, ratification is the process by which a state declares its consent to be bound to a treaty. In the case of bilateral treaties, ratification is usuall ...

procedures required for

treaties A treaty is a formal, legally binding written agreement between sovereign states and/or international organizations that is governed by international law. A treaty may also be known as an international agreement, protocol, covenant, convention ...

under the

international law International law, also known as public international law and the law of nations, is the set of Rule of law, rules, norms, Customary law, legal customs and standards that State (polity), states and other actors feel an obligation to, and generall ...

, the programme was set up as an intergovernmental agreement consisting of: * the ''Memorandum of Economic and Financial Policies'' (MEFP), * the ''Memorandum of Understanding on Specific Economic Policy Conditionality'' (MoU), * and the ''Technical Memorandum of Understanding'' (TMU), the actual Loan Facility Agreement. The agreements were signed in June 2011 by the Portuguese government and the European Commission. Portugal and the IMF already had a long history before the 2011 bailout with the past IMF rescue packages to the Portuguese Republic in 1977 and 1983.

Further events

In order to accomplish the

/IMF-led rescue plan for Portugal's

sovereign debt A country's gross government debt (also called public debt or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit occ ...

crisis, in July and August 2011 the new government led by

announced it was going to cut on state spending and increase austerity measures, including public servant wage cuts and additional tax increases. On 6 July 2011, the ratings agency Moody's had cut Portugal's credit rating to junk status, Moody's also launched speculation that Portugal could follow Greece in requesting a second bailout. After the bailout was announced, the Portuguese government headed by Pedro Passos Coelho managed to implement measures to improve the State's financial situation, including tax hikes, a freeze of civil service-related lower-wages and cuts of higher-wages by 14.3%, on top of the government's spending cuts. The Portuguese government also agreed to eliminate its golden share in

Portugal Telecom Altice Portugal S.A. (formerly known as PT Portugal) is the largest telecommunications service provider in Portugal. Since 2 June 2015 the company has been a wholly owned subsidiary of Altice, a multinational cable and telecommunications company ...

which gave it veto power over vital decisions. In 2012, all public servants had already seen an average wage cut of 20% relative to their 2010 baseline, with cuts reaching 25% for those earning more than 1,500 euro per month. This led to a flood of specialized technicians and top officials leaving the public service, many looking for better positions in the private sector or in other European countries. In December 2011, it was reported that Portugal's estimated budget deficit of 4.5 percent in 2011 would be substantially lower than expected, due to a one-off transfer of pension funds. The country would therefore meet its 2012 target a year earlier than expected. Despite the fact that the economy is expected to contract by 3 percent in 2011 the IMF expects the country to be able to return to medium and long-term debt sovereign markets by late 2013. Any deficit means increasing the nation's debt. To bring down the debt to sustainable levels will require a 10% budget surplus for several years according to some estimates. In the following months the country started to be seen as moving on the right track. However, the unemployment level rose to over 15 percent in the second quarter 2012 and it was expected to rise even further in the near future. On 7 June 2012, Portugal's largest listed bank by assets, Millennium BCP, was rescued by the Portuguese Government headed by Passos Coelho, through 3 billion euros ($3.8 billion) in state funds it took from the country's bailout package. In January 2013, the European Commission approved, under EU state aid rules, a rescuing recapitalisation totalling €1.1 billion granted by Portugal to Banco Internacional do Funchal S.A. ( Banif) for reasons of financial stability. The Portuguese Republic committed to provide a far-reaching restructuring plan for Banif by 31 March 2013. On 3 August 2014,

Banco Espírito Santo Banco Espírito Santo (, BES) was a Portugal, Portuguese bank based in Lisbon that on 3 August 2014 was split in two banks: Novo Banco, which kept its healthy operations, and a "bad bank" to keep its toxic assets. It once was the second-largest ...

, at the time the largest listed bank in Portugal, was rescued by the State. The bank was subject to
resolution measure
and split in two:

Novo Banco Novo Banco, SA, trading as Novobanco (, ), is a major Portuguese financial bank headquartered in Lisbon, Portugal. Following the entry into force of European Banking Supervision in late 2014, Novobanco has been designated as a Significant Institut ...

, which kept its healthy operations ("good bank"), while the toxic assets remained in the existing bank ("

bad bank A bad bank is a corporate structure which isolates illiquid and high risk assets (typically non-performing loans) held by a bank or a financial organisation, or perhaps a group of banks or financial organisations. A bank may accumulate a large p ...

") which entered into liquidation in 13 July 2016. Novo Banco received a €4.9 billion bailout to be recapitalized, funded by the Portuguese Resolution Fund, to which the Portuguese government lent €3.9 billion.

References

Literature

* {{cite book, ref=ocp79, url=http://ec.europa.eu/economy_finance/publications/occasional_paper/2011/pdf/ocp79_en.pdf, title=The Economic Adjustment Programme for Portugal, author=European Commission, authorlink=European Commission, series=Occasional Papers, issue=79, date=June 2011, place=Brussels, isbn=978-92-79-19332-3, doi=10.2765/16343, doi-broken-date=1 November 2024

External links