Adjusting in the euro area: the case of Portugal

Vtor Gaspar

Trinity College Dublin April 11th, 2013

Crisis and its aftermath: a chronology

1999

2008

2009

2010

2011

2012

2013

2014

2015

POSTPONING THE ADJUSTMENT

Building up imbalances Accumulation of macroeconomic imbalances and structural bottlenecks Unsustainable Public Finances An error of judgment Crisis as simple demand-driven contraction

ECONOMIC ADJUSTMENT PROGRAM

Achievements Strong compliance with the Program 7/12 reviews Over 80% of financing received(1) Progress in all dimensions of the Program Fiscal Consolidation Deleveraging and Financial Stability Structural Transformation Challenges Constitutional Court ruling on 2013 Budget Law Return of the sovereign to the financial markets Focus on investment and credit recovery to relaunch employment and economic growth Maintain political and social support Complete public expenditure review AFTER CRISIS

Macroeconomic stability and sustainable growth Balanced budget and reduction of public debt Financial Stability Open and Competitive Economy

Expansionary Fiscal Policy Alignment of Sovereign and Banking Risks Further Postponement Leading to Nearbankruptcy

Overindebtedness
Anemic Economic Growth Low Productivity

(1) Up to the 7th disbursement, following the 6th Review

Outline

1. Slump and Bust. 2. The Economic Adjustment Program. 3. Macroeconomic developments. 4. Fiscal Consolidation. 5. Deleveraging and Financial Stability. 6. Structural Transformation.

7. Conclusion.

1. Slump and Bust

Portugals imbalances exposed in the context of the economic and financial crisis

1995-2008

II

2008-2010

Build-up of imbalances in the Portuguese economy: The Portuguese economy is in serious trouble: Productivity growth is anemic. Growth is very low. The budget deficit is large. The current account deficit is very large. Sudden-Stop materialized in early 2011

An Error of Judgment in the conduct of policy:

1. Alignment of systemic risk in the Portuguese economy

2. Postponement of adjustment through expansionary fiscal policy 3. Heightened vulnerability in the context of the EA sovereign debt crisis

Blanchard, 2007

Blanchard, O. (2007). Adjustment with the Euro: the Difficult Case of Portugal, Portuguese Economic Journal.

1995-2008: Build-up of imbalances in the I Portuguese economy

Portugal did not adjust to the specific requirements of the Monetary Union Unsustainable public finances Budget deficits over 3% of GDP since the mid-1990s Upward trend of General Government gross debt, surpassing 60% of GDP in 2004

Overindebtedness

Increase of Private debt since the mid1990s, reaching 240% of GDP in 2008 Current account deficits of ~10% for a decade

For too long, Portugal preserved fiscal rules and procedures developed during decades of monetary instability and limited capital mobility. Such fiscal rules and procedures were completely inadequate in the context of the euro area.

Deteriorating competitiveness Anemic Increase in unit labor costs economic growth and low Increase in the real effective exchange productivity rate

I Anemic economic growth

Gross Domestic Product 1998 = 100
180 170 160 150 140

Ireland Spain Germany Greece Portugal

130
120 110 100 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 (P) (P)

Italy

Source: AMECO, April 2013

I Excessive private debt accumulation

Portuguese households and non financial corporations did not have direct access to foreign financing.

Private debt, non consolidated, annual data Percentage of GDP

350
300 250

The banking system acted as an intermediary.

This is the origin of the heightened systemic risk in Portugal, associated to an increase in the loan-todeposit ratio.

Ireland
200 150 100 50 Portugal Spain Italy Germany Greece

0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Eurostat, April 2013

2008-2010: An Error of Judgment in the conduct II of policy

Expansionary fiscal policy Sovereign provides guarantees to the banking sector Increase in bank credit to the public sector Effectiveness in the short run, but significant long run costs in terms of lost activity and unemployment Denial about to the need to adjust

Alignment of systemic risk in the Portuguese economy

Postponement of adjustment through expansionary fiscal policy

Heightened vulnerability in the context of the EA sovereign debt crisis

Presentation of 2010 State Budget as a defining moment

Increase of sovereign risk throughout 2010, despite ECB support

Considering the events of 2008-2010 as a simple demand-driven business-cycle fluctuation was an error of judgment that proved to be expensive in the context of the euro area sovereign debt crisis.

II Increase in bank credit to General Government

Domestic Credit Year-on-year change, %
Domestic Credit (Households and Non-Financial Corporations) 14% 12% 10% 8% Total Domestic Credit (non-monetary sector)

6%
4% 2%

Domestic credit to General Government

0%
2007 2008 2009 2010
-2% -4%

2011

Source: Bank of Portugal

10

II Public sector expansion offset private adjustment

Net lending /net borrowing by institutional sector As percentage of GDP

General Government
8 6 4 2

Non Financial Private Sector

Financial Corporations
8 6 4 2

Total Economy

0
-2 -4 -6 -8

0
-2 -4 -6 -8 -10 -12
2007 2008 2009 2010 2011 (P)

-10
-12

2007

2008

2009

2010

2011 (P)

Source: National Statistics Institute, April 2013

11

Successive upward revisions of 2009-2010 Budget II deficits

General Government Budget Balance (% GDP) 2009 2010 -1,6 -1,5 -1,5 -0,4 -1,5 -0,4 -2,4 -1,5 -0,4 -2,6 -1,5 -0,7 -2,2 -2,8 -3,3 -3,9 -2,9 -6,5 -6,7 -5,9 -8,0 -9,3 -9,3 -9,3 -9,3 -10,1 -10,2 -8,0 -8,3 -8,3 -7,3 -7,3 -7,3 -9,1 -9,8 General Government Gross Debt (% GDP) 2009 2010 64,5 66,2 65,2 62,2 62,6 59,7 64,5 62,5 59,7 64,3 62,5 60,5 64,4 65,2 66,6 69,7 70,5 75,4 81,5 74,6 77,4 76,6 77,2 76,3 76,1 83,0 83,7 84,6 85,4 86,0 83,5 82,1 82,4 93,0 94,0

GOP 2005-2009 Jul-05 PEC 2005-2009 Dec-05 PEC 2006-2010 Dec-06 ROPO 2007 Apr-07 EC autumn Oct-07 PEC 2007-2011 Dec-07 EC spring Apr-08 ROPO 2008 May-08 OE 2009 Oct-08 EC autumn Oct-08 PEC 2008-2011 Jan-09 EC spring Apr-09 ROPO 2009 May-09 General election (27-Sep-09) EC autumn Oct-09 OE 2010 Jan-10 "PEC I" PEC 2010-2013 Mar-10 ROPO 2010 Jul-10 "PEC III" OE 2011 Oct-10 "PEC IV" PEC 2011-2014 Mar-11 IMF Staff Report Jun-11 INE/BdP Final Data Mar-13

Note: The document known as "PEC II" corresponds to Law no. 12-A/2012 of 30 June.
12

The impact of the 2010 State Budget in financial II markets

10-year Government Bond yields, October 2008 October 2010 Spread against Germany in percentage points
Ireland 5 (p.p.) Italy Portugal January 26th, 2010: Presentation of 2010 State Budget Spain May 7th, 2010: Eve of final decision on Greek Program

Aug-09

Jul-10

May-09

May-10

Feb-10

Aug-10

Sep-09

Jun-09

Jun-10

Sep-10

Oct-08

Jul-09

Oct-09

Nov-08

Nov-09

Mar-09

Feb-09

Dec-08

Dec-09

Mar-10

Jan-09

Jan-10

Apr-09

Apr-10

Oct-10

Source: Bloomberg, February 2013 (generic yield indices, BID values)

13

The Error of Judgment led to a Sudden Stop in international private financing

10-year Government bond yields Spread against Germany in basis points

1200
Austria Belgium France Netherlands Finland Italy Spain Ireland Portugal Greece

The effects of expansionary fiscal policy on public finance sustainability were revealed in the context of the sovereign debt crisis in the euro area, exposing Portugals structural imbalances.

1000 800 600 400

200 0

In April 2011, Portugals request for financial assistance became inevitable to avoid bankruptcy.

Source: Bloomberg

14

2. The Economic Adjustment Program

A balanced Program to cope with the major challenges of the Portuguese economy

Fiscal consolidation Putting fiscal policy on a sustainable path The Economic Adjustment Program protects Government financing from market pressures, allowing an orderly adjustment of imbalances and time to build up confidence and credibility.

Deleveraging and financial stability

The Economic Adjustment Program Reduction of debt and financing needs of the economy

Structural transformation Implementing structural reforms to contribute to potential growth

16

3. Macroeconomic developments

Strong increase in exports

Exports-to-GDP ratio Percentage

Projections Annual average growth rate

+7% +1%

36 31 32 32 28 31

39

40

41

27

29

28

28

28

28

28

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: AMECO, March 2013

18

Reversal in internal demand contraction

Contributions to GDP growth (year-on-year) Percentage points

8 6 4 2 0 -2 -4 -6 -8 -10 -12

7,7 4,9 5,6 3,9 1,0 -3,1 -2,3 -3,1 -3,5 -3,8
Net External Demand GDP Internal Demand

-4,8 -7,2 -8,7 -10,7

2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4

-7,4

Source: National Statistics Institute, March 2013

19

Weaker growth prospects for the Euro Area

Economic forecasts for 2013 Volume, percentage change on preceding year
1,0
0,0 to 2,0 GDP EA GDP PT External demand PT (goods)

0,7

-0,4 to 1,4

Euro area

0,2

0,1
-0,9 to 0,3

-0,2

-0,3

-0,9 to -0,1

Apr 2012 Jun 2012 Jul 2012 EC Eurosystem IMF

3,2

Sep 2012 ECB

Oct 2012 IMF

2,8

Oct 2012 Dec 2012 Jan 2013 Feb 2013 Mar 2013 EC Eurosystem IMF EC ECB
2,8

Portugal

0,2 -1,0 -1,0 -2,3 -0,4

Jun 2012, 4th Review

Sep 2012, 5th Review

Nov 2012, 6th Review

Mar 2013, 7th Review

20

Source: European Central Bank, International Monetary Fund, European Commission and Ministry of Finance

led to a downward revision of economic prospects

7th review: March 2013 2012 GDP and expenditure components (volume, percentage change on preceding year) 2013 2014 5th review: September 2012 2012 2013 2014

Private Consumption Public Consumption GFCF Exports Imports GDP

Contributions to GDP growth (percentage points) Domestic Demand Net Exports Deflators GDP HICP Labor Market Unemployment Rate (%) Employment Growth (%)
Source: Ministry of Finance, National Statistics Institute, March 2013

-5,6 -4,4

-3,5 -2,6

0,1 -2,0

-5,9 -3,5 -14,1 4,3 -6,6 -3,0

-2,2 -3,5 -4,2 3,6 -1,4 -1,0

0,2 -1,5 2,7 5,5 3,3 1,2

-14,5
3,3 -6,9 -3,2

-7,6
0,8 -3,9 -2,3

2,5
4,4 3,1 0,6

Economic forecasts in a context of risks and uncertainty regarding the adjustment process

-7,0 3,9 -0,1 2,8 15,7 -4,2

-4,1 1,8 1,7 0,7 18,2 -3,9

0,0 0,6 1,3 1,0 18,5 -0,5

-7,1 4,1 0,3 2,8

-2,9 1,9 1,3 0,9

0,3 0,9 0,9 1,1

15,5
-4,3

16,4
-1,7

15,9
0,4
21

Rebalancing internal demand and supply

Contributions to GDP growth Percentage points Internal demand Net exports GDP Growth

6 4 2,4 2 0 -2 -2,9 -4 -6 -8
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
22

1,9 0,0 0,6

1,5

1,8

Projections for 2013-2016: Do not consider impacts from structural reforms Assume moderate export market share gains

-1,6 -3,2

-2,3

Source: National Statistics Institute (2007-2012) and Ministry of Finance (2013-2016), April 2013

Adjustment has come at a high social cost

Real GDP growth projections 2011 = 100

May 2011 7th review 20

Unemployment rate projections Percentage

May 2011 7th review

110

105

15

100

10

95

90
2011 2012 2013 2014 2015 2016

0 2011 2012 2013 2014 2015 2016

Rise in the unemployment rate above original forecasts reflects:

Lower employment given firms need to reduce costs (financing difficulties and uncertainty)
Transfer of resources from the non-tradable sector to the tradable sector given the ongoing rebalancing of the Portuguese economy

Source: International Monetary Fund, Ministry of Finance

23

in Portugal and Ireland.

Real GDP growth 2007 = 100

Unemployment rate Percentage

20 18 16 14

110

Portugal

Ireland

Portugal

Ireland

105

12
100 10 8 95

6
4 2

90 2007 2008 2009 2010 2011 2012 2013 2014 2015

0 2007 2008 2009 2010 2011 2012 2013 2014 2015

Note: 2013-2015 - projections Source: Ireland IMF, 9th Review (April 2013); Portugal - Ministry of Finance, 7th Review (March 2013) 24

4. Fiscal consolidation

The end-2012 fiscal deficit target was met ().

2012 General Government Deficit (*) As percentage of GDP (national accounts)
0,9

0,6

Statement by the EC, ECB and IMF on the Seventh Review Mission to Portugal (**): The end-2012 fiscal deficit target was met ().
4,9

0,7

6,6 6,0

2012 Deficit according to the Programs definition

ANA Concession

One-off 2012 Deficit statistical estimate reclassifications (EDP)

Other oneoff effects

2012 Deficit excluding one-off effects

(*) After the 7th review, the 2012 general government deficit was revised downwards in the context of the EUs Excessive Deficit Procedure. The effects on the trajectories of the general government deficit, the structural balances and the general government gross debt will be considered in the next complete forecast presented by the Ministry of Finance. (**) Statement by the EC, ECB and IMF on the 7th Review Mission to Portugal: http://europa.eu/rapid/press-release_MEMO-13-226_en.htm Source: Ministry of Finance, European Commission, March 2013 26

Adjustment of the fiscal path

7th review targets (Mar 2013) 5th review targets (Sep 2012) Programs initial targets (May 2011)

Deficit targets As percentage of GDP (national accounts basis) 5,5%

Balancing act between:

Economic and social costs of the adjustment Inevitability of fiscal consolidation: Portugals financing needs and the repercussions on public debt sustainability 4,5%

5,0% 4,0% 4,5% 3,0% 2,5% 2,3% 2,5% 1,9%

1,9%

(P) Projection; not a Program target Source: Ministry of Finance, March 2013

2012

2013

2014

2015(P)
27

Structural adjustment will continue

Structural balances (*) As percentage of GDP
2010 4 2011 2012 2013 2014 2015 2016

2
0

2,1

2,7

3,2

1,1 0,0
-1,1

-2

-4
-6 -8

-2,5 -4,3 -6,0 -6,6

-2,1 -3,3

-1,6

-10
-12

-8,8

2/3 of the structural adjustment is already concluded

Structural balance Saldo estrutural

Structural primary balance Saldo primrio estrutural

(*) After the 7th review, the 2012 general government deficit was revised downwards in the context of the EUs Excessive Deficit Procedure. The effects on the trajectories of the general government deficit, the structural balances and the general government gross debt will be considered in the next complete forecast presented by the Ministry of Finance.
Source: Ministry of Finance, March 2013 28

Fiscal adjustments progressing in tandem

Structural balance Percentage of GDP

Structural primary balance Percentage of GDP

4
2 0 2010 -2 -4 -6 -8 2011 2012 2013 2014 2015

4 2 0 2010 -2 2011 2012 2013 2014 2015

-4
-6 -8 Portugal Ireland Portugal -10 Ireland

-10

Note: 2013-2015 - projections Source: Ireland IMF, 9th Review (April 2013); Portugal - Ministry of Finance, 7th Review (March 2013) 29

Public debt peaking at 124% in 2014

General Government Gross Debt (*) As percentage of GDP
125% 123,0% 122,4% 122,2% 120,0% 115% 123,7% 122,3% 119,6% 115,8% 122,5% 119,4%

120%

110% 108,0% 108,1% 105%

100%

6th review 7th review

95% 93,5% 93,5% 90% 2010 2011 2012 2013 2014 2015

2016

(*) After the 7th review, the 2012 general government deficit was revised downwards in the context of the EUs Excessive Deficit Procedure. The effects on the trajectories of the general government deficit, the structural balances and the general government gross debt will be considered in the next complete forecast presented by the Ministry of Finance.
Source: Ministry of Finance, March 2013 30

Public debt: close to Ireland, lower than Italy

Public Debt Percentage of GDP

180

160

140 Greece Italy 120 Portugal

Ireland
100 Spain

80

60 2010 2011 2012 2013(P) 2014(P) 2015(P) 2016(P)

Source: GR - IMF,Jan2013; IT IMF,Oct2012; PT - Ministry of Finance,7th review,Mar2013; IE IMF,Apr2013; ES IMF,Mar2013;

31

5. Deleveraging and financial stability

Portugal as a net lender for the first time in two decades

Current and capital account (*) Percentage of GDP 1952 4 1960 1970 1980 1990 2000 2010

1993

2012

-4

-8

-12

-16
(*) 1953 is the earliest observation available. Source: Bank of Portugal, March 2013 33

Fast correction of external imbalances

Balance of Payments, key balances Percentage of GDP

2010 6 2011 2012 2013 2014 2015 2016

4
2,5 2 0,4 0 -0,5 -1,9 1,7

3,1 2,1 0,7

3,6 2,4 1,0

1,4
-0,3

1,9 0,4

-2
-4 -4,4 -6

-5,6
-7,7

-8
-10 -12

-7,2

External Balance of Goods and Services Net Lending (+) / Net Borrowing (-) Current Account Balance

-9,0
-10,4

Source: Ministry of Finance, March 2013

34

Increasingly stable banking system

Loans-to-deposits ratio Percentage
National Banking System

Core Tier 1 Ratio, Portuguese Banking System Percentage

167

158

150

140

136

128 120

11,2 11,5 7,8 8,1 8,7 9,6

10

Eight Largest Banks

157

147

137

128

126

119

Q2

Q4

Q2

Q4

Q2

Q4 (*)

Q2

Q4

Q2

Q4

Q2

Q4 (*)

2010

2011

2012

2010

2011

2012

Banking system close to 120%. This target was excluded from the Memorandum after the 7th Review.
(*) Preliminary values for 2012Q4 Source: Bank of Portugal, March 2013

The 10% Core Tier 1 Ratio was reached ahead of schedule.

35

Jan-07 Jan-07 Abr-07 Abr-07 Jul-07 Jul-07 Out-07 Out-07 Jan-08 Jan-08 Abr-08 Abr-08 Jul-08 Jul-08 Out-08 Out-08 Jan-09 Jan-09 Abr-09 Abr-09 Jul-09 Jul-09 Out-09 Out-09 Jan-10 Jan-10 Abr-10 Abr-10 Jul-10 Jul-10 Out-10 Out-10 Jan-11 Jan-11

Interest rates on bank loans still high (1/2)

Interest rates on MFI Loans (1y) to Non-Financial Corporations | New Businesses only Percentage

Source: ECB, March 2013

Abr-11 Abr-11
Jul-11 Jul-11 Out-11 Out-11 Jan-12 Jan-12 Abr-12 Abr-12 Jul-12 Jul-12 Out-12 Out-12 Jan-13 Jan-13
Spain Italy Ireland Spain Greece Portugal Greece Italy Portugal Germany Ireland France Germany

France

36

Jan-07 Jan-07 Abr-07 Abr-07 Jul-07 Jul-07 Out-07 Out-07 Jan-08 Jan-08 Abr-08 Abr-08 Jul-08 Jul-08 Out-08 Out-08 Jan-09 Jan-09 Abr-09 Abr-09 Jul-09 Jul-09 Out-09 Out-09 Jan-10 Jan-10 Abr-10 Abr-10 Jul-10 Jul-10 Out-10 Out-10 Jan-11 Jan-11

Interest rates on bank loans still high (2/2)

Interest rates on MFI Loans (1y) to Non-Financial Corporations | Outstanding amount Percentage

Source: ECB, March 2013

Abr-11 Abr-11
Jul-11 Jul-11 Out-11 Out-11 Jan-12 Jan-12 Abr-12 Abr-12 Jul-12 Jul-12 Out-12 Out-12 Jan-13 Jan-13
France Ireland France Germany

Greece

Portugal Greece Italy Portugal Spain Italy Ireland

Spain Germany

37

6. Structural transformation

Structural reforms advancing at good pace

Implemented measures Labor Market Product Market Judicial system Increase in working days: up to 7 additional (3 vacation + 4 holidays) Reduction of restrictions to individual dismissal: based on performance Restrictions on automatic extension of collective agreements Reduction of rents in network and sheltered sectors Electricity: -1,4Bn NPV of future payments Mobile communications networks: reduction of 80% since 2010 Pharmaceuticals: expenditure from 1,5% (in 2010) to 1,25% of GDP (in 2012) Infrastructure PPP: -1,3Bn NPV of future payments Liberalization of the energy and gas market Adoption of a law on arbitration to facilitate out-of-court settlement Approval of new Code of Civil Procedure, submitted to Parliament Adoption of a new Judiciary Map, submitted to Parliament Reduction of the backlogged cases Operational balance in 2012 achieved for the State-Owned Enterprises sector as a whole New insolvency code and corporate recovery New Competition Law harmonized with the EU legal competition framework Liberalization of regulated professions access and exercise Approval of the Public Professional Associations Framework Law Accomplishment of over two thirds of the implementation of the Services Directive Reduction of firms administrative burden: licensing requirements and other legal formalities Adoption of the new Urban Lease, Renovation works and Urban Rehabilitation Laws
39

NON-EXHAUSTIVE

Business environm ent

Main structural reforms discussed during the 7th Review

Keys facts
Reform of severance pay Reform of the Corporate Income Tax Importance of maintaining social consensus: social partners were consulted Agreement on new limits for severance payments, to align with EU average: New permanent contracts: 12 days per year of service For the remaining contracts, 18 days per year of service in the first 3 years of the contract and 12 days for subsequent years Cap of 12 months will remain in place Approval of a framework law against best international practices Reinforcement of the regulatory environment to protect the public interest and to promote market efficiency Ensuring the administrative, financial and management autonomy of regulators Strengthening its organizational, functional and technical independence Discussion of the reform of the CIT: create a modern, stable and competitive tax according to international standards Aspects considered: i) reviewing the rate structure; ii) redefining the tax base; iii) reducing the costs of context; and iv) restructuring the international tax policy Presentation of a draft law by end-June, to be sent for public consultation and discussion
40

Framework Law for Regulators

Privatization program as a flagship in the structural transformation agenda

2013
Energy retail and production Energy retail and production Mail distribution Railway logistics Air transport Electricity distribution Air infrastructure Waste management Insurance Seguros (1)
Seguros

(2)

Decisive concessions

Urban Transportation (Lisbon, Porto) Maritime Ports

(1) Concession and privatization (2) Expected completion date by Caixa Geral de Depsitos Source: Ministry of Finance, January 2013 41

Privatizations results exceeding expectations in revenue obtained

Selected bidders

% Equity

21,35% China Three Gorges: China E.ON: Germany Eletrobras: Brazil Cemig: Brazil

40% State Grid: China Oman Oil Company: Oman

100% Vinci: France Atlantic Consortium: Germany, Australia Blink Consortium: Colombia, Portugal, Spain, Netherlands EAMA Consortium: Argentina, Portugal, Spain, Brazil Consortium Zurich Airport: Switzerland, Brazil, USA (1) EUR 3080M (3) Pre-existing investment plan for ANA to be fully respected ANA as the center of Vinci Groups airport activity

Bidders

Revenue Financing

EUR 2693M: premium of 53.6% per share (2) EUR 2000M through Chinese banks EUR 2000M until 2015 in wind farms

EUR 593M: premium of 33.6% per share (2) EUR 1000M through Chinese banks Strategic plan for national economy development (e.g. I&D center construction)

Investment

(1) List of five final bidders only (2) Considering the closing price of the day before the Council of Ministers decision

(3) Equity Value (1200M) + Concession Fee (1200M) + Pre-Existing Debt (680M)

42

7. Conclusion

Treasury Bond Yields at 2010 levels

Treasury Bonds yields Percentage
2y 5y 10y
6 Sep 2012: Announcement of ECBs OMT 23 Jan 2013: Return to bond markets

25

9/10 May 2010: Extraordinary ECOFIN meeting: approval of the support package for Greece

5 May 2011: Formal Announcement of Portuguese Program

20

15

10

Sep-11

Sep-10

Nov-10

Nov-11

Sep-12

Nov-12

Jan-10

Jan-11

Jan-12

Feb-10

Feb-11

Feb-12

Jan-13

May-11

May-12

Feb-13

Mar-10

Jun-10

Jul-10

Aug-10

Oct-10

Mar-11

Jun-11

Jul-11

Aug-11

Oct-11

Mar-12

Jun-12

Jul-12

Aug-12

Oct-12

Mar-13

Apr-10

Apr-11

Apr-12

May-10

Dec-10

Dec-11

Dec-12

Source: Bloomberg (last observation: April 9 th, 2013)

Apr-13

44

Compliance with all the quantitative targets of the Program

Limits of the Program Budget deficit National accounts basis(*) Percentage of GDP 5,9 5,0 Cash basis(*) Billion euros 10,3 9,0 180 Public debt(*) Billion euros

176

4,4

4,9

7,3

8,4

168

177

2011

2012

2011

2012

2011

2012

(*) Targets according to the definitions set in the Program All the quarterly targets for the budget deficit on a cash basis and for the public debt ceiling were also met Source: Ministry of Finance, March 2013 45

 and the strong compliance with the Program

Status of measures required in each review Percentage

7%
28%
31%

8%
16%

11%
17%

9%
16%

14%

12%

91%

21%

27% Not observed/ delayed Ongoing Observed/ partly observed

72%

76%
61%

73%

76%

64%

60%

1st Review 2nd Review 3rd Review 4th Review 5th Review 6th Review 7th Review (*)
(*) Preliminary values for 7th Review Source: European Commission, March 2013 46

are key to the European support in regaining market access.

Redemption profile * Billion euros
24 21 18 15

EFSF
EFSM IMF

Favorable developments in Portugal and Ireland:

Significant progress in economic adjustment Strong compliance with the Program Ongoing strategy to regain market access

12
9 6 3 0

Other medium and long term debt

The Eurogroup ministers are determined to support Ireland's and Portugal's efforts to regain full market access and successfully exit their well-performing programmes [ and ] have agreed to an adjustment of the maturities of the EFSF loans to both countries in order to smooth the debt redemption profiles of those countries. (Mar 16th, 2013**) Technical details to be further discussed

Substantial increase of refinancing needs in 2014-2016 and 2021

* Beyond 2028 -- 2032: 5,20 bn. 2037: 6,97 bn. 2038: 4,40 bn. 2042: 1,50 bn. 2050: 0,01bn ** Eurogroup Statement on PT and IR: http://www.eurozone.europa.eu/newsroom/news/2013/03/eg-statement-portugal-ireland-16-03-13/ Source: IGCP (last update: January 23rd, 2013); Eurogroup 47

Towards sustainable growth and job creation

Confidence and Credibility

Improving perspectives for the EA: OMT, Banking Union, Agreement on assistance to Greece and Spain Solid foundations for economic recovery

Balanced budget, reduction of public debt and financial stability

Gradually achieving better financing conditions: Main driver in the present economic context is financial Portugal is reversing the sudden stop

Creating an open and competitive economy:

Positive impact from ongoing structural reforms Portugal as an attractive location for investment and foreign and domestic capital
48