Council Implementing Decision of 14 December 2011 amending Implementing Decision 2011/344/EU on granting Union financial assistance to Portugal (2012/92/EU)

Council Implementing Decision

of 14 December 2011

amending Implementing Decision 2011/344/EU on granting Union financial assistance to Portugal

(2012/92/EU)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union,

Having regard to Council Regulation (EU) No 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism(1), and in particular Article 3(2) thereof,

Having regard to the proposal from the European Commission,

Whereas:

(1) Upon a request by Portugal, the Council granted financial assistance to it (Council Implementing Decision 2011/344/EU(2)) in support of a strong economic and financial adjustment programme (Programme) aiming at restoring confidence, enabling the return of the economy to sustainable growth, and safeguarding financial stability in Portugal, the euro area and the Union.

(2) Under the Commission’s current projections for nominal Gross Domestic Product (GDP) growth (– 0,6 % in 2011, – 1,9 % in 2012, 1,9 % in 2013 and 3,9 % in 2014), the fiscal adjustment path is in line with the Council Recommendation to Portugal of 2 December 2009 with a view to bringing an end to the situation of an excessive government deficit, pursuant to Article 126(7) of the Treaty, and consistent with a path for the debt-to-GDP ratio of 107,2 % in 2011, 116,2 % in 2012, 118,1 % in 2013 and 116 % in 2014. The debt-to-GDP ratio would therefore be stabilised in 2013 and be placed on a declining path thereafter, assuming further progress in the reduction of the deficit. Debt dynamics are affected by several below-the-line operations, including sizeable acquisitions of financial assets, in particular for possible bank recapitalisation and financing to state-owned enterprises (SOEs) and differences between accrued and cash interest payments.

(3) The quarterly quantitative performance criterion on the general government cash balance for the second quarter of 2011 was met and preliminary data suggest that this was also the case in the third quarter of 2011. However, with the information available as of early November, on a European Systems of Accounts (ESA95) basis, a budgetary gap of around 1,5 % of GDP is projected for 2011 as a whole. Part of this fiscal gap had been ascertained by August, in particular due to current expenditure overruns, lower-than-projected current non-tax revenue and higher-than-budgeted capital spending. The Portuguese Government had taken some measures to narrow this gap, namely a one-time surcharge in personal income tax and an increase in the VAT rate for natural gas and electricity, which was brought forward to 1 October 2011 from 2012. But these measures were not sufficient to close the fiscal gap, particularly as further slippages have been identified more recently, including higher interest payment, lower-than-projected capital revenue and sales of real estate. The Portuguese Government is seeking an agreement with the banks on a partial transfer of their pension funds to the State social security system, to be undertaken in full compliance with the Union State aid rules, and to be used exceptionally to meet the deficit target of 5,9 % of GDP in 2011. The Portuguese Government agreed not to rely on further transfers of pension funds to meet the Programme targets for the coming years.

(4) Progress is being made to strengthen public financial management through improved reporting and monitoring, and reforming the budgetary framework in line with the recommendations from Commission services and International Monetary Fund (IMF) staff.

(5) The stock of arrears should be significantly reduced over the Programme period. To this end, a strategy for the validation and settlement of arrears for the entities inside the general government as well as for SOEs classified outside the general government should be prepared. In this strategy, a roadmap should be provided which sets out how and when the stock of arrears should be stabilised. Moreover, various options of settling arrears should be explored, providing appropriate incentive mechanisms including the potential of rebates for early settlements and rewarding entities that no longer accumulate new arrears.

(6) Given the significant drag that the Autonomous Region of Madeira has exerted on Portuguese public finances, the Portuguese Government should prepare a financial arrangement with that region with a view to containing the high level of fiscal risks still remaining. The arrangement should be designed in line with the Programme and comprise, among others, a debt sustainability analysis.

(7) Portuguese banks are to work towards meeting the higher capital requirements as stipulated by the Programme, taking also into account the implications deriving from the European Banking Authority-led exercise based on the valuation of sovereign exposures according to end-September market prices, the special on-site inspection programme and the transfer of banks’ pension funds to the State social security system. A legal framework, the purpose of which is to provide temporary public support to banks, is under preparation. A balanced and orderly deleveraging of the banking sector remains critical, while safeguarding adequate credit for the productive sectors of the economy. The sale of Banco Português de Negócios is in its final stage although the transaction still needs clearance from the Union competition authorities. Progress has also been made to strengthen the supervisory and regulatory framework, including via technical assistance.

(8) Progress in labour and product market reforms is essential to restore competitiveness and raise the growth potential. Labour market reforms to align the protection and rights under fixed and open-ended contracts and to establish an employer-financed fund for paying out workers’ severance entitlements are advancing. The privatisation programme is being implemented under the new framework law for privatisation. A deep and urgent restructuring of SOEs is at the top of the Portuguese Government’s agenda. Further progress is needed to lower entry barriers to the sheltered sectors with a view to fostering competition and reduce excessive rents. Structural reforms should be implemented decisively and closely monitored.

(9) Notwithstanding the relatively large first and second disbursements, the Portuguese Government’s cash position remains under strain. This is explained by increasing financing needs from SOEs, a sharp increase in households’ redemption of savings certificates, and persisting financial market stress.

(10) In light of these developments, Implementing Decision 2011/344/EU should be amended,

HAS ADOPTED THIS DECISION:

(1)

OJ L 118, 12.5.2010, p. 1.

(2)

OJ L 159, 17.6.2011, p. 88.