Lisbon bites the bullet

The European Commission and the International Monetary Fund on Wednesday held talks with the main opposition Portuguese parties after agreeing a bailout package worth up to 78 billion euroswith the caretaker government of Prime Minister José Sócrates.

A cross-party accord on the bailout is required after the Portuguese parliament rejected the austerity package presented by the Sócrates administration on March 23, a move that prompted the prime minister's resignation and the calling of elections for June 5.

Announcing the agreement late Tuesday, Sócrates, who had resisted going the way of Greece and Ireland in seeking help to resolve its debt crisis, said the government had obtained a "good" deal. "This is a deal that defends Portugal," he said. Sócrates said the terms of the loan would be less onerous than those set for Greece and Ireland.

The package changes the schedule for reducing the budget deficit, and includes 12 billion eurosin assistance for the banking sector.

Below are some of the major aspects of the deal negotiated by the Sócrates government with the EC, the International Monetary Fund and the European Central Bank. The details are drawn from a memorandum of understanding, a copy of which was posted by local daily Diário Económico on its website.

Deficit reduction

The public deficit is to be cut to 5.9 percent of GDP this year from 9.1 percent last year, to 4.5 percent in 2012 and 3.0 percent in 2013. The Sócrates' austerity plan called for the shortfall to be reduced to 4.6 percent of GDP this year.

Tax

The government will reduce corporate and personal income tax deductions to save 350 million euros. Some categories of goods and services will move to a higher value-added tax bracket, with the aim of increasing revenues by 410 million euros a year. Excise taxes on items such as tobacco will be increased to yield

250 million eurosin 2012.

Banks

Banco Português de Negócios will be sold by the end of July, while state-owned Caixa Geral de Depósitos' operations are to be streamlined. Banks will be required to achieve a Tier 1 capital ratio of 9 percent by the end of this year and 10 percent by the end of 2012, and will present plans on how they plan to do so with the Bank of Portugal by June. Some 12 billion eurosof the bailout has been set aside to assist banks requiring public funds to meet the new solvency requirements.

Public sector wages

The public sector wage bill as a percentage of GDP is to be cut in 2012 and 2013. The payroll itself will be reduced by 1 percent a year in the period 2012-2014 in the central government and by 2 percent in regional administrations. Nominal wages will be frozen in 2012 and 2013.

Pensions

Pensions above 1,500 euros a month will be subject to a progressive tax to yield savings of at least 445 million euros. Pensions will be frozen in 2012.

Privatization

Power group EDP, the electricity grid operator REN and airline TAP will be fully privatized by the end of this year. Other companies, including GALP, will also be privatized, with the sell-offs to raise some 5.5 billion euros.

Jobless claims

The maximum period of entitlement to unemployment benefits will be cut to 18 months from three years at present. The cap on benefits will be reduced to 1,048 euros a month from 1,257 euros, with the amount to be reduced after six months.

Healthcare

Measures will be introduced to shave 550 million eurosoff the healthcare bill through to 2013, including a cap on pharmaceutical spending of 1.25 percent of GDP by the end of 2012 and 1 percent in 2013. A centralized procurement system for the purchase of medical goods will be set up.

Transport

The program calls on the government to eschew any new public-private partnerships. The high-speed train project between Lisbon and Oporto is suspended for three years, while there will be no public funds for the planned new Lisbon airport.