Transcript of a Conference Call with IMF Mission Chief Poul Thomsen on the IMF E xecutive Boards Approval of an Extended

Fund Facility for Portugal May 20, 2011 MS. NARDIN: Thank you all for participating in this conference call. As you know , the IMF Executive Board has just approved the request of the Portuguese author ities for financial support from the IMF. With me is the IMF Mission Chief for P ortugal, Mr. Paul Thomsen, as well as Hossein Samiei, who also works on the Port uguese desk and was part of the mission. Poul will offer brief introductory rema rks and then we will open it up for questions. MR. THOMSEN: Thank you very much and thank you for joining us. As Simonetta just said, the Board just concluded and recognized that this is a comprehensive and ambitious program. They noted that it has three main parts and is above all, foc used on structural reforms, so it is very commensurate with the fact that Portug als problems are, above all else, of a structural nature. As we said before, even during the good years, Portugal was hardly growing. In addition, Portugal has a significant need for fiscal adjustment, as well as need to be sure that financi al deleveraging does not take an excessive toll on credit growth and pose a risk to its economic growth. Let me just say that the Executive Board realized that this program is, as I sai d before, bold but realistic. It has a fiscal adjustment that is strong and fron tloaded, but its not excessively frontloaded. Thats why we have a target for 2011 that is somewhat higher than the governments previous target. But it does maintai n the target of getting to a deficit of 3 percent by 2013. I think this suggests that we strike a good balance between, on the one hand, making sure that we dont have excessive downward pressure on growth in the near term until structural re form takes hold, but on the other hand, we need to restore market access, and we need to have relatively ambitious frontloaded fiscal reforms. Let me just make four or five points on the fiscal program, very quickly. One, o n the frontloading, as I said, half of the near adjustment of about 10 percent o f GDP is upfront in the first year. Two, all the measures needed to get down to 3 percent by 2013 have been identified upfront. There are no fiscal gaps in the program going forward. Three, targets are supported by strong structural reforms to restore control over public-sector spending. As you know, one of the main pr oblems has been runaway increases in spending, not least because of public-priva te partnerships (PPPs) and state-owned enterprises, and theres much in the progra m to tighten control and scrutiny in these areas. Four, I think its well balanced between expenditure and revenue measures. About two-thirds of the adjustment co mes from the expenditure side, which is in line with the fact that public sectors demand on resources is much too high. And five, its socially well balanced with considerable efforts to try to alleviate the impact on vulnerable groups. On structural reform, it was emphasized that there was a welcomed focus on tryin g to increase competition in non-tradable sectors. I think it is recognized by m ost that Portugals problem is really a lack of competition, in addition to inflex ible labor markets, also a focus of the program. As you know, on the structural side, we have this potentially very important policy of trying to increase expor ts via a fiscal devaluation in the form of a sharp reduction in social security contributions, possibly in the order of 34 percent of GDP (offset by other approp riate tax and expenditure adjustments). This is something that will have to be c alibrated in the coming months. On the financial sector there are a number of measures to strengthen banks capita l position and then try de-linking banks access to funding from the governments ac cess to funding. One of the problems has been that the governments problems in ac cessing capital markets has spilled over into the banking system and created a p roblem for banks to access wholesale financing. And we hope we can de-link that by strengthening banks to market-based measures, but there are a couple of backs top mechanisms there to provide capital, to provide liquidity for banks that can not rely entirely on market-based needs. Let me just quickly also talk about the financing package. The authorities extrao rdinary program would be supported by financial support from the international c ommunity in the amount of 78 billion from the EFF and from the IMF. The support

is very frontloaded to allow a notable reduction in short-term liabilities of th e government already at issue. This is critical to avoid damaging credit as leas t as far as small and medium enterprises are concerned. The financial package ha s also been calibrated with a rule to allow Portugal to stay out of the market f or medium- and long-term bonds for slightly more than two years. So the financin g package will give the government the breathing space needed to establish a str ong record of policy implementation before having to return to the market, but u ndertaking the needed adjustment in a socially responsible way. So let me just conclude by saying this is not going to be an easy program. There is going to be a difficult period of adjustment, and the economy is going to be in recession until early 2013 when we expect recovery to start taking hold. Imp ortant in this regard, it is a program that is very ambitious to boost output an d employment in a lasting manner over the medium term and with a strong implemen tation of that, we do, as I say, see a recovery taking hold in 2013. QUESTION: You mentioned that the economy will be in recession until early 2013. How is Portugal going to be able to recover from its difficulties while undergoi ng a recession as a result of the austerity measures? MR. THOMSEN: Well, as I said, its inevitable, particularly with a fixed exchange rate. Theyre dealing with a fiscal problem, and the problem of high leverage will entail downward pressure on output in the first year or two, and that will domi nate. The program will have a lot of measures to improve competitiveness, and Im sure you will start seeing very soon -- this year -- a response of exports to th e program, but it will take some time for these close-enhancing measures to take effect. But I think its one of the strengths of the program that we acted very c onservatively on growth. We wont see any significant impact of these tough reform s assumed into the program until after the three-year period of the program. The program is unlikely to get any big negative surprises on the growth side. And I think thats one of the strengths of the program, that it will be robust to diffe rent GDP assumptions. QUESTION: Im wondering whether you might go into more detail about the structural reforms to increased competition. And then I wonder if both you might talk a li ttle bit more about how youre going to de-link the bank access from funding away from government? MR. THOMSEN: On competition, there are a number of issues. It is a question of t rying to deal with what is an uncomfortable, close, relationship between governm ent and some of the larger entities in the non-tradable sector, and there are se veral measures. They include regulatory reforms; that is a key measure. There is obviously also other things -- labor market reforms is essentially a question o f allowing more entry, if you will, and a question of fairness, allowing those w ho are not inside the labor market, not the least the young, to compete for jobs . In the financial sector, the increase in capital ratios from six to ten -- six t o eight was already announced before the program was decided, but it was further increased to ten. We think that is an important strengthening of the capital ba se of the banks and that will make it easier for them to access external markets . It will simply make them more attractive for foreign borrowing. But it will al so, I think, increase the chance as banks work to broaden or to strengthen their capital base, we hope that this process will bring in some strategic foreign in vestors that already have this market access. So this is -- I think this is a ve ry important part of the program. Question: Could you say if Mr. Lipsky led the discussion today on the Portugal l oan and also how the discussion went in the absence of Dominique Strauss-Kahn? D id that hinder the discussion in any way? And just one final question would be d id the Board also take up the leadership position in their discussion today? MS. NARDIN: Thank you for this question. No, there was absolutely no problem. Mr . Lipsky as Acting Managing Director led the discussion, and no other issue othe r than Portugal came up. Thank you. QUESTION: Okay, can you say anything about the leadership discussion? MS. NARDIN: No, thank you. This is a conference call on Portugal. QUESTION: You know we have elections on June 5. There are very important measure

s in the memoranda, on the housing markets and labor markets, with some objectiv es defined to be achieved in the third quarter of this year. My question is do y ou think we can, in fact, accomplish these objectives with the upcoming election s? And the second question is if we dont accomplish these goals, whats going to ha ppen? MR. THOMSEN: Indeed, there will be elections in early June and it might take som e weeks to form a new government. I think we have tried to strike a right balanc e there. It is an ambitious schedule, but there is also urgency to dealing with these problems. QUESTION: Its a flexible schedule, okay? MR. THOMSEN: I dont expect there to be any problems in meeting these targets. We had very careful discussions, as Im sure you know, with the main opposition parti es in addition to the current government. And its quite striking how most of the key issues, at least on the structural reform side, have broad political support which to me is one of the encouraging things. So I hope that we can move ahead faster. I think even before the elections, there will be a technical assistance mission from the IMF to Portugal to get this technical work going. We are not wa iting until the elections to start forming working groups and diagnose technical issues and move ahead. QUESTION: How long is the reimbursement period? Is it seven and a half? Is it te n years? And I was just wondering now out of your region, Greece is the only cou ntry not to have this type of loan. When do you expect the switch to happen? MR. THOMSEN: The repayment period for an EFF is up to 12 years, including the gr ace period. As far as Greece is concerned, we have said before we stand ready to convert to an EFF, but this is not about Greece, so Im not going to go into a di scussion about timing on that. QUESTION: We are not talking about Greece, but can you say -- seeing the problem s in Greece, can you say whether there is anything specific you have learned fro m the Greece case for the program you are setting up for Portugal? MR. THOMSEN: I can assure you we learn as we go along. But the thing is we empha size is that every country, every situation, is different, and Portugal and Gree ce are fundamentally different. Portugals problems are much more of a structural nature with less of a fiscal problem than in Greece. On the other hand, they hav e a much more leveraged banking system. So the challenges are different and, the refore, if you compare the programs and decide they are actually very, very diff erent. QUESTION: Can you tell us what will be the interest rates for the IMF loans? MR. THOMSEN: Yes, this is a flexible rate, right now it will be about 3.25 perce nt for the first three years, and then it will be about 4.25 percent for amounts outstanding for more than three years. QUESTION: Can you comment about the timing of the privatization process? MR. SAMIEI: The privatization program in the agreement with the authorities is f or the moment quite a bit based on their own plans and their own plans involve p rivatization in the transport, energy, communication, and insurance. And over th e course of the coming two and a half, three years, this involves about 5 to 6 b illion euros. What we are doing is we are encouraging and the authorities are pl anning to do reviews of the state-owned enterprises in order to see further scop e for privatization. And they realize the importance of encouraging and accelera ting the privatization program. MR. THOMSEN: To conclude, let me just repeat why I think that this is a robust p rogram, why this program will succeed. I think it will succeed because it has a very good policy mix, well tailored to the special problems facing Portugal, and its a frontloaded program. It will succeed because it is not only well balanced economically, but also socially with quite a number of measures to alleviate the impact on the most vulnerable groups. It will succeed because its an exceptional ly large financing package by any measure for a program for an economy of Portug als size. And finally above all the program will succeed because I think from my meeting there that theres broad political consensus in Portugal. And as I said, t he opposition actually agreed with the main building blocks, the key objectives of the program, which offers a sense of a strong ownership on the part of Portug

al, that this is the right program at the right time to get the country back on track. So I think this has a good chance, a very good chance, of succeeding. MS. NARDIN: Thank you Poul, Hossein, and thank you all very much. http://www.imf.org/external/np/tr/2011/tr052011a.htm