"Turistas não vêm para os territórios visitar florestas de vidro", diz Turismo do Alentejo

[atomez]

Portugal Faces Challenges in Meeting Bailout Terms

LISBON — The smell of fresh paint wafted recently inside a mansion on the grounds of the São Bento Palace, the official residence of the Portuguese prime minister.

International lenders calling this week on Pedro Passos Coelho, who moved in just two months ago, will be looking, however, for more than superficial improvements to the country’s economy before writing their next check.

Three months after approving a €78 billion, or $111 billion, bailout for Portugal, officials from the International Monetary Fund, the European Commission and the European Central Bank are conducting their first review of progress toward meeting conditions set for emergency financing. Those include budget cuts and an economic overhaul intended to stimulate growth.

Portuguese officials and business executives expect a broadly favorable assessment following general elections that replaced a minority Socialist government with a stronger, center-right one. But they also worry that elements out of their control — a widening debt crisis in Europe and fears of a slowdown in global growth that have been rattling markets — could undermine Portugal’s efforts.

“To make the changes that we have agreed to is a necessary condition, but not a sufficient one” alone, said António Mexia, chief executive of EDP Energias de Portugal, the country’s largest utility.

“There are now a lot of things that no longer depend on Portugal but instead on Spain and Italy and other countries around us,” he said. “In this crisis not even bigger countries than ours can say that they control fully their destiny.”

Still, since his electoral victory in June, Mr. Passos Coelho, Portugal’s new prime minister, has struck a confident note, insisting that his government would reduce the budget deficit by more than a third this year, to 5.9 percent of gross domestic product from 9.1 percent in 2010.

Such drastic tightening would be a significant improvement on the performance of the previous government. It would also contrast with the situation in Greece, which remains on the brink of default more than a year after becoming the first euro zone country to be rescued.

The Finance Ministry in Athens reported last month that the budget deficit there had widened by almost a third in the first six months of this year — blowing its targets — as a deep recession exacerbated by budget cuts dampens government revenue.

“What we learnt from Greece is that it’s all about implementation,” said Carlos Moedas, a former Goldman Sachs investment banker named by the Portuguese prime minister to oversee the budget agreement with its foreign creditors. “The kind of implementation monitoring that we are putting in place is completely new in Portugal and I believe even ahead of what was done in past I.M.F. programs.”

As in the bailouts of Greece and Ireland, the lenders have set quarterly progress reviews. For Portugal, the outcome of the first review is expected as early as the end of this week.

When the I.M.F. was last called to Portugal’s rescue in the early 1980s, the intervention was widely unpopular, largely because it led to a sharp rise in interest rates.

This time, despite grumblings by Portugal’s powerful Communist party about foreign intervention and excessive austerity demands, “there is a real and widespread sense of relief that we are finally getting helped by qualified financial experts, because people here are completely fed up with mismanagement by our politicians,” said Pedro Reis, author of “Returning to Growth,” a recent book detailing Portugal’s economic woes.

Nuno Vasconcellos, who heads Ongoing, a family investment company that has several media businesses, as well as a significant stake in Portugal Telecom, said the arrival of the I.M.F. “must be seen as the perfect excuse to make all the reforms that Portugal has refused to consider for the past 30 years.”

Indeed, one of Mr Passos Coelho’s challenges is to lead by example and rein in spending in the country’s bloated public administration, as well as improve performance at state-controlled companies that have accumulated about €40 billion of debt.

This week, for instance, Standard & Poor’s downgraded the debt of Comboios de Portugal, the railroad company, warning that “there is an increasing likelihood the company could default on its next five months’ maturities if timely extraordinary support is not provided by the Portuguese government.”

His Socialist predecessor, José Sócrates, pushed three separate austerity packages through Parliament that failed to make much of a dent. At the fourth attempt, opposition lawmakers balked, prompting Mr. Sócrates to resign.

After an early election on June 5, Mr. Passos Coelho formed the youngest and smallest government since Portugal’s return to democracy in the 1970s. Four out of 11 ministers have no party affiliation, including Vitor Gaspar, the finance minister.

In contrast to Mr. Sócrates, who governed with a parliamentary minority, Mr. Passos Coelho can count on the support of a center-right coalition that is in command of Parliament. In fact, lawmakers agreed last month to limit their traditional summer recess to two weeks instead of five weeks to sign off on urgent legislation.

But despite the political change in Lisbon, bond investors have kept Portugal’s borrowing costs close to record highs, although the bailout was designed to cover the country’s financing needs until 2013. Meanwhile, Portugal is next scheduled to sell as much as €1.25 billion in short-term bills on Aug. 17.

Furthermore, the Portuguese stock market index has tumbled this month amid worldwide concerns over fiscal imbalances in much larger economies like the United States and Italy. That could jeopardize Portugal’s privatization calendar because falling share prices mean that sales will not raise as much as the government had hoped.

First in line is the power company EDP, in which the government is hoping to sell a stake of about 20 percent to a foreign utility for about €2.5 billion.

Anxiety over Portugal’s own fiscal performance has not subsided. On July 5, Moody’s Investors Service cut Portugal’s debt rating to junk status, and warned of a further cut because of the “formidable challenges” faced by the incoming government. Underlining such challenges, the statistics agency reported in late June that the deficit was 8.7 percent of G.D.P. at the end of the first quarter — leaving almost three percentage points to be cut before year-end.

Mr. Passos Coelho has since announced a one-time tax on the traditional Christmas bonus paid to Portuguese employees, which could yield €800 million in additional proceeds. While taxpayers are seeing their salaries squeezed, banks have been ordered to raise their core capital to 9 percent by year-end, higher than the 7 percent threshold set under the most recent international banking rules.

Carlos Costa, the governor of the Bank of Portugal, said that banks had a “very big” pool of assets that could be divested to strengthen their balance sheets. Such deleveraging would also prepare the banks for the eventual winding down of loans to commercial banks from the European Central Bank.

“We must avoid the mistake of thinking that the provisioning of liquidity from the E.C.B. will stay forever,” he said.

Bankers, however, are upset. Carlos Santos Ferreira, chief executive of Millennium BCP, one of the country’s biggest banks, warned that stricter capital requirements would lower profitability, pushing investors to search for higher returns on equity elsewhere.

“Portuguese banks are no longer on a level playing field,” he said.

The additional pressure on banks comes as Portugal is already bracing for a lengthy recession. Mr. Gaspar, the finance minister, forecast last month that the economy would contract 2.3 percent this year and 1.7 percent in 2012.

Mr. Mexia, the chief executive of EDP, said he was worried most that retrenchment by the banks would cause them to slow their lending to businesses.

“The main problem is already one of liquidity,” he said. “Without liquidity, you just dry up in the sun.”