PARIS (MNI) – Portugal’s E78 billion bailout program is “facing
strong headwinds” because of a weaker-than-expected economy and a
decline in the public support that has until now backed the adjustment
effort, the International Monetary Fund said Thursday.

A day after approving the disbursement of E1.5 billion in new aid to
Portugal, the Fund said in a staff report that weaker tax revenues had
caused a “fiscal gap” to emerge that would make it impossible for
Portugal to meet its deficit targets for this year and next.

Portugal has made “good progress in reducing macroeconomic
imbalances under the program,” the IMF report said. “But after a strong
start, the program has entered a more challenging phase.”

The troika – the IMF, the European Commission and the European
Central Bank – has already announced that Lisbon’s deficit targets
would be raised to 5% from 4.5% for this year and to 4.5% from 3% for
2013 because of the revenue shortfall.

Portugal will remain in recession in 2013, with GDP expected to
decline by a 1%, the IMF said. Total debt would peak later than expected
at 124% of GDP in 2014.

The IMF’s mission chief for Portugal, Abebe Aemro Selassie, said he
expected the government’s debt to remain sustainable. “The key for us is
that debt will peak in the very near term and then will be on a downward
trajectory,” Selassie said in a conference call from Washington.

The IMF said the additional financing need of E3.5 billion caused
by the one-year extension of Portugal’s fiscal targets would be
met through increased issuance of T-bills and a possible expansion of
the privatization program.

The IMF noted that the adjustment program has produced important
gains, but that risks to the program were increasing. Among the
positive effects, Portugal’s current-account deficit is expected to
decline to less than 2% of GDP next year from 10% in 2010. Exports have
also grown more strongly then expected

But risks to the program are “significant,” the IMF said,
especially if weaker demand from Eurozone countries reduces Portuguese
exports or if the new austerity measures hit domestic consumption more
strongly than expected.

Public support for the adjustment program is also weakening, the IMF
said.

“There are signs aplenty of adjustment fatigue,” the report said.
“With unemployment already very high and the economy in recession, the
difficult policy choices that have to be made are testing the
broad-based political consensus in support of the program that has been
in place to date,” the report said.

–Paris newsroom, +33142715540; jduffy@marketnews.com

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