In line with Article 3(9) of Implementing Decision 2011/344/EU, the Commission, together with the International Monetary Fund (‘IMF’) and in liaison with the European Central Bank (‘ECB’), has conducted the first review of the authorities’ progress on the implementation of the agreed measures as of the effectiveness and economic and social impact of those measures.

Under the Commission’s current projections for nominal GDP growth (-0,7 % in 2011, 0,0 % in 2012, 2,5 % 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 is consistent with a path for the debt-to-GDP ratio of 101,1 % in 2011, 106,2 % in 2012, 107,3 % in 2013 and 106,4 % 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.

The quarterly quantitative performance criterion on the general government cash balance for the first half of 2011 was met. However, recent data pointed to an opening gap between fiscal trends and the 2011 deficit targets. Expenditure overruns in the first half of the year, underperforming non-tax revenue, the reclassification of some operations led to a projected shortfall of about 1,1 % of GDP over the whole of 2011. The net costs related to the sale of Banco Português de Negócios (‘BPN’) would add another 0,2 % of GDP to the headline deficit. The authorities have reacted promptly. Budget execution has been tightened, a one-time surcharge on the personal income tax has been introduced, increases in the VAT rates of natural gas and electricity have been brought forward from 2012 and sales of concessions will be stepped up. The authorities should also seek to adopt other consolidation measures of a permanent nature and/or frontload other measures planned for next year. The ongoing process of a phased transfer of banks pension funds to the State social security system should exceptionally provide a buffer towards meeting the deficit target for 2011. The acquired assets of these pension funds should not be used in a way detrimental to long-term fiscal sustainability. The government should not count on further transfers of pension funds to meet the targets for the coming years. 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 the Commission services and IMF staff.

Banks are working towards meeting the higher capital requirements as required by the programme. Existing legislation is being amended to strengthen the augmented solvency support facility. A balanced and orderly deleveraging of the banking sector remains critical, while safeguarding adequate credit for dynamic sectors to spur growth. A buyer for BPN has been found although the deal still needs clearance from Union competition authorities. Progress has also been made to strengthen the supervisory and regulatory framework, including via technical assistance. Portuguese banks passed the July 2011 European Banking Authority (‘EBA’) stress tests with mixed results reinforcing the need to implement the programme reforms to strengthen the sector.

Notwithstanding the relatively large first disbursement, the 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.

Progress in labour and product market reforms is essential to restore competitiveness and raise growth potential. In this respect, the special rights of the state in private companies were abolished ahead of schedule. The privatisation programme is being accelerated and broadened. A severe and urgent restructuring of SOEs is at the top of the government’s agenda. 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. Progress is being made in preparation for a budget-neutral so-called fiscal devaluation, and authorities remain committed to take a major first step in this area with the 2012 Budget. Structural reforms should be implemented decisively and closely monitored.

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