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 Portugal, officially the Portuguese Republic, In recognized minority languages of Portugal: :* mwl, República Pertuesa is a country located on the Iberian Peninsula, in Southwestern Europe, and whose territory also includes the Macaronesi ...

in order to cope with the

2010–14 Portuguese financial crisis 1 (one, unit, unity) is a number representing a single or the only entity. 1 is also a numerical digit and represents a single unit of counting or measurement. For example, a line segment of ''unit length'' is a line segment of length 1 ...

. The three-year programme was signed in May 2011 by the

Portuguese Government The Government of Portugal is one of the four sovereignty bodies of the Portuguese Republic, together with the President of the Republic, the Assembly of the Republic and the courts. It is both the body of sovereignty that conducts the general p ...

under then-Prime Minister

José Sócrates José Sócrates Carvalho Pinto de Sousa, GCIH (born 6 September 1957), commonly known as José Sócrates (), is a Portuguese politician who was the prime minister of Portugal from 12 March 2005 to 21 June 2011. For the second half of 2007, h ...

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 t ...

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

European Commission The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body ...

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 19 member ...

, the

European Central Bank The European Central Bank (ECB) is the prime component of the monetary 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 most important centra ...

(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, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster gl ...

(IMF). In June 2014, 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 indentur ...

of €0.4 billion being disbursed in November 2014.

Background

On 6 April 2011, the resigning Prime Minister

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, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster globa ...

(at the time managed by

Dominique Strauss-Kahn Dominique Gaston André Strauss-Kahn (; born 25 April 1949), also known as DSK, is a French economist and politician who served as the tenth managing director of the International Monetary Fund (IMF), and was a member of the French Socialist ...

) and the

European Financial Stability Facility The European Financial Stability Facility (EFSF) is a special purpose vehicle financed by members of the eurozone to address the European sovereign-debt crisis. It was agreed by the Council of the European Union on 9 May 2010, with the object ...

, like Greece and the Republic of Ireland had done before. A set of reputed economists (including former Prime Minister and eventual President

Aníbal Cavaco Silva Aníbal António Cavaco Silva, GCC, GColL, GColIH (; born 15 July 1939) is a Portuguese economist who served as the 19th president of Portugal, in office from 9 March 2006 to 9 March 2016. He had been previously prime minister of Portugal f ...

) 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 political and economic union of member states that are located primarily in Europe. The union has a total area of and an estimated total population of about 447million. The EU has often been ...

. The causes for the low level of productivity 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 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 Stabilisation Mechanism (EFSM) is an emergency funding programme reliant upon funds raised on the financial markets and guaranteed by the European Commission using the budget of the European Union as collateral. It runs un ...

, the

, 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 approval of an act of its agent that lacked the authority to bind the principal legally. Ratification defines the international act in which a state indicates its consent to be bound to a treaty if the parties inte ...

procedures required for

treaties A treaty is a formal, legally binding written agreement between actors in international law. It is usually made by and between sovereign states, but can include international organizations, individuals, business entities, and other legal pers ...

under the

international law International law (also known as public international law and the law of nations) is the set of rules, norms, and standards generally recognized as binding between states. It establishes normative guidelines and a common conceptual framework for ...

, 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 also have a long history.

Further events

In order to accomplish the

/IMF-led rescue plan for Portugal's sovereign debt crisis, in July and August 2011 the new government led by

Pedro Passos Coelho Pedro Manuel Mamede Passos Coelho (; born 24 July 1964) is a Portuguese politician and university guest lecturer who was the 118th prime minister of Portugal, in office from 2011 to 2015. He was the leader of the Social Democratic Party (PSD ...

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

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 business and finance, a golden share is a nominal share which is able to outvote all other shares in certain specified circumstances, often held by a government organization, in a government company undergoing the process of privatization and ...

in Portugal Telecom 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.EC approves Banif rescue recapitalisation
theportugalnews.com (24 January 2013)

References

Literature

* {{cite book, ref=ocp79, url=http://ec.europa.eu/economy_finance/publications/occasional_paper/2011/pdf/ocp79_en.pdf, format=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

External links