# EUR-Lex - 52012PC0757 - EN

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# 52012PC0757

**Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision 2011/344/EU on granting Union financial assistance to Portugal /* COM/2012/0757 final - 2012/0352 (NLE) */**

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EXPLANATORY MEMORANDUM

Upon a request
by Portugal, the Council granted financial assistance to Portugal on 17 May
2011 (Council Implementing Decision 2011/344/EU) in support of a strong economic and reform programme aiming at restoring confidence, enabling the return of the economy to
sustainable growth, and safeguarding financial stability in Portugal, the euro
area and the EU.

In line with Article 3(10) of Decision
2011/344/EU, the Commission, together with the IMF and in liaison with the ECB,
has conducted the sixth review to assess the progress on the implementation of
the agreed measures as well as their effectiveness and economic and social
impact.

Taking into account the recent economic,
fiscal and financial developments and policy actions, the Commission considers
that some changes to the economic policy conditions underpinning the assistance
are necessary to secure the programme's objectives, as explained in the
recitals of the proposed amendments to the Council implementing Decision.

2012/0352 (NLE)

Proposal for a

COUNCIL IMPLEMENTING DECISION

amending Implementing Decision 2011/344/EU
on granting Union financial assistance to Portugal

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning
of the European Union,

Having regard to Council Regulation (EU) No
407/2010 of 11 May 2010 establishing a European financial stabilisation
mechanism[1],
and in particular Article 3(2) thereof,

Having regard to the proposal from the
European Commission,

Whereas:

(1)       In line with Article 3(10)
of Council Implementing Decision 2011/344/EU, the Commission, together with the
International Monetary Fund (IMF) and in liaison with the European Central Bank
(ECB), has conducted the sixth review of the authorities' progress on the
implementation of the agreed measures as well as of the effectiveness and
economic and social impact of the agreed measures.

(2)       After a strong decline of
3% in 2012 in real terms, economic activity is expected to gradually recover
starting from the second half of 2013 with quarterly growth rates returning to
positive territory. Looking forward, the economic recovery is expected to
gather pace in 2014 despite some headwinds from domestic consumption. Risks to
the macroeconomic outlook are tilted to the downside. In particular, a
stronger-than-expected deterioration of the economic climate in some euro area
countries would have spill-over effects on Portugal.

(3)       The 5% of GDP budget
deficit target for 2012 remains valid, even though there are some risks. While
the budgetary execution on the expenditure side remains under control, revenues
until October continue to fall short of already downward revised targets. Additional
saving measures worth around 0.3% of GDP are being implemented to meet the
deficit target, but there are some uncertainties with regard to their final
yield. Finally, the statistical authorities are still assessing whether the
sale of the airport concession (ANA), estimated at 0.7% of GDP, can be treated as
a deficit-reducing operation.

(4)       The 2013 budget law, which
was adopted on 27 November, includes discretionary measures of more than 3% of
GDP to achieve the deficit target of 41⁄2% of GDP in 2013. On the expenditure
side, the budget envisages a sizeable reduction in the public sector wage bill
through lower employment coupled with a reduction in overtime payments and
other compensations. Rationalisation efforts in the health sector, State Owned
Enterprises (SOEs), Public-Private-Partnerships (PPPs) will be deepened, while
social spending will be further streamlined. On the revenue side, the budget
foresees a comprehensive reform of the Personal Income Tax (PIT) that will
reduce the number of brackets and increase the average tax rate in line with
European standards, while preserving progressivity and curbing tax benefits. In
addition, a surcharge of 3.5% is imposed on the part of taxable income above
the minimum wage and a solidarity surcharge of 2.5% on the income of the top
tax bracket and of 5% on income above EUR 250 000. Corporate tax revenues are
increased by means of limiting the deductibility of interest costs, reducing
the threshold for applying the highest rate on profits and changing the
methodology for special prepayment to companies under group taxation, among
others. The budget also includes changes in indirect taxation, notably an
increase in excise taxes on tobacco, alcohol and natural gas, a broadening of the
base of property taxation after revaluation of properties and the creation of a
financial transaction tax. In addition, social contributions will rise as they
will be also charged on supplementary payments for public employees and on
unemployment benefits.

(5)       Taking into account the
measures in the budget, revenue increases will contribute by 80 % to the fiscal
adjustment in 2013 while the remaining 20% will come from expenditure
reductions (after considering the effect of the reinstatement of the 13th
salary in the public sector and 1.1 monthly pensions, following the decision of
the Constitutional Court). In view of the risks associated with the strongly
revenue-based adjustment, the authorities are preparing contingency measures
amounting to 0.5% of GDP which will be activated if risks materialise. The
measures will mainly consist of expenditure savings, notably further reductions
in payroll costs, and will be further specified in early 2013 in time for the
seventh review.

(6)       The budgetary adjustment process
is underpinned by a range of structural measures to enhance control over
government expenditure and improve revenue collection. In particular, a
comprehensive reform of the budgetary framework is foreseen to bring it in line
with best practices in budgetary procedures and management. The new commitment
control system is starting to show results but implementation needs to be monitored
closely to ensure that commitments are in line with funding. Reforms in the public
administration, which have already produced significant savings, will continue.
Key reforms to restructure the revenue administration are close to completion
and the authorities are enhancing monitoring and strengthening revenue
compliance. The renegotiation of PPPs has started and significant savings are projected
for 2013 and beyond. State-owned enterprises are expected to reach operational
balance on average by the end of the year. Reforms in the health care sector
are producing significant savings and implementation is continuing broadly in
line with targets.

(7)       A comprehensive
expenditure review has been initiated with the objective to enhance the
efficiency and equity of public services, while generating spending savings of
about EUR 4 billion or 2.5% of GDP. The exercise aims at reducing redundancies
across the public sector functions and entities, and reallocating resources
toward growth-friendly spending areas. The identification, quantification and
timetable of implementation of the measures should be specified by February
2013. The 2013 Stability Programme will provide further information on the
medium-term fiscal consolidation plan.

(8)       Under the Commission's current
projections for nominal GDP growth (-1.0 % in 2011, ‑2.3% in 2012,
0.3% in 2013 and 2% in 2014) and the fiscal targets of 5% of GDP in 2012, 41⁄2%
in 2013 and 21⁄2% in 2014, the debt-to-GDP ratio is expected to develop as
follows: 108.1% in 2011, 120% in 2012, 122.2% in 2013 and 122.3% in 2014. The
debt-to-GDP ratio would level off from 2012 onwards and be placed on a downward
path after 2014, assuming further progress in the reduction of the deficit.
Debt dynamics are affected by several below-the-line operations, including
sizeable acquisitions of financial assets, notably for possible bank
recapitalisation and financing to state-owned enterprises and differences
between accrued and cash interest payments.

(9)       The capital augmentation
exercise amounting to EUR 8.2 billion is nearly completed and will allow the
participant banks to meet the EBA regulatory capital buffers as well as the end-of-year
10% Core Tier 1 program target. The indicative loan-to-deposit target of 120% by 2014 will likely be
met with some banks already below the threshold at this stage. Efforts to
diversify the sources of funding for the corporate sector are being
strengthened. The legal acts on bank resolution including recovery plans,
bridge banks and a resolution fund are being finalised.

(10)     Further progress has been
made in implementing growth and competitiveness enhancing structural reforms.
In addition to strengthening active labour market policies, the authorities are
committed to reducing severance payments to promote labour market flexibility
and job creation. The implementation of the action plans on secondary school
and vocational training is overall progressing as scheduled.

(11)     The transposition of the
Services Directive aiming at reducing barriers to entry and boost competition
and economic activity by facilitating access for new entrants to the market in
the different economic regimes is proceeding at good pace. Licensing procedures
and other administrative burdens are also being simplified in different
economic sectors such as environment and territorial planning, agriculture and
rural development, industry, or geology. A Framework Law to set the main
principles of the functioning of the most important National Regulator
Authorities (NRA), including their endowment with strong independence and
autonomy, is under preparation.

(12)     Reforms of the judicial
system continue to advance according to the agreed schedule. Further progress
has been achieved on the reduction of backlog cases and broader reforms such as
the geographical reorganisation of the court districts and the reform of the
Code of Civil Procedure.

(13)     Each measure required by
this Decision is instrumental in re-establishing a sound economic and financial
situation in Portugal and to restoring its capacity to finance itself on the
markets,

HAS ADOPTED THIS DECISION:

Article 1

Article 3 of Implementing Decision
2011/344/EU is amended as follows:

(1)          paragraph 7 is replaced by
the following:

'7. Portugal shall adopt the following
measures during 2013, in line with specifications in the Memorandum of
Understanding:

(a)          the general government deficit
shall not exceed 41⁄2% of GDP in 2013. The 2013 budget shall include permanent
consolidation measures of at least 3% of GDP aiming at reducing the general
government deficit within the timeframe referred to in paragraph 3. The
Portuguese Government shall explore ways to increase the weight of expediture
reduction in the overall consolidation package for 2013 in order to ensure a
medium-term growth‑friendly fiscal adjustment tilted towards the
expenditure side. Given budgetary execution risks the Portuguese Government
shall prepare contingency measures of 0.5% of GDP by early 2013 which should be
activated in case of a materilasation of such risks;

(b)          the 2013 budget shall include
revenue-raising measures, notably a reform of the personal income tax that simplifies
the tax structure, a broadening of the tax base through the elimination of some
tax benefits and increases of the average tax rate, while preserving progressivity;
a broadening of the corporate income tax base; an increase in the investment
income tax rate; an increase in excise taxes and changes in recurrent property
taxation;

(c)          the 2013 budget shall include
expenditure-saving measures, notably a rationalisation of public administration,
education, health care and social benefits; a reduction of the wage bill by
decreasing permanent and temporary staff and reducing overtime pay; a streamlining
of public and private social transfers and subsidies; a reduction in transfers
to local and regional authorities; and a lowering of operational and capital
expenditures by SOEs;

(d)          Portugal shall continue
implementing its privatisation programme;

(e)          Portugal shall develop common
revenue forecasting guidelines for subnational governments;

(f)           Portugal shall deepen the use of
shared services in public administration;

(g)          Portugal shall reduce the number
of local branches of line ministries (e.g. tax, social security, justice) by
merging them in citizens' shops and developing further the e-administration
over the duration of the programme;

(h)          Portugal shall continue the
reorganisation and rationalisation of the hospital network through
specialisation, concentration and downsizing of hospital services, joint
management and joint operation of hospitals. Finalise the implementation of the
action plan by the end of 2013;

(i)           With the support of
internationally-reputed experts and following the adoption of the amendments to
the New Urban Lease Act Law 6/2006 and the Decree Law which simplifies the
administrative procedure for renovation, Portugal shall undertake a
comprehensive review of the functioning of the housing market;

(j)           Portugal shall develop a
nationwide land registration system to allow a more equal distribution of benefits
and costs in the execution of urban planning;

(k)          Portugal shall make fully
operational the management tool to analyse, monitor and assess the results and
impacts of education and training policies and shall establish the professional
schools of reference;

(l)           Portugal shall complete the
adoption of the outstanding sectorial amendments necessary to fully implement
the Services Directive;

(m)         Portugal shall implement targeted
measures to achieve steady reduction of the backlogged enforcement cases in view
of resolving the backlog of court cases;

(n)          Portugal shall adopt the
Framework Law on the main National Regulator Authorities in order to guarantee
their full independence and financial, administrative and management autonomy;

(o)          Portugal shall improve the
business environment by completing pending reforms on the reduction of administrative
burden [Point of Single Contact (PSC) foreseen by the Services Directive and
'Zero Authorisation' projects] and by carrying out further simplification of
existing licensing procedures, regulations and other administrative burdens in
the economy which are a major obstacle for the development of economic
activities;

(p)          Portugal shall complete the reform
of the port work legislation and the ports' governance system, including the
overhaul of port operation concessions;

(q)          Portugal shall implement the
measures enhancing the functioning of the transport system;

(r)           Portugal shall implement the
measures eliminating the energy tariff debt and fully transpose the Third EU
Energy Package.'

__________________________

- OJ L 376, 27.12.2006, p. 36.

** OJ L 255, 30.9.2005, p. 1.

*** OJ L 48, 23.2.2011, p. 1.

(2)          paragraph
9 is replaced by the following:

'9. With a view to restoring confidence in
the financial sector, Portugal shall adequately recapitalise its banking sector
and ensure an orderly deleveraging process. In that regard, Portugal shall implement the strategy for the Portuguese banking sector agreed with the
Commission, the ECB and the IMF so that financial stability is preserved. In
particular, Portugal shall:

(a)          advise banks to strengthen their
collateral buffers on a sustainable basis;

(b)          ensure a balanced and orderly
deleveraging of the banking sector, which remains critical in permanently
eliminating funding imbalances. Banks' funding plans aim at reducing the
loan-to-deposit ratio to an indicative value of approximately 120% in 2014 and
reducing the reliance on Eurosystem funding in the medium-term. Those funding
plans shall be reviewed quarterly;

(c)          encourage the diversification of
financing alternatives for the corporate sector and in particular the SMEs
through an array of measures aiming at improving their access to the capital
markets and export credit insurance;

(d)          continue to streamline the
state-owned CGD group;

(e)          optimise the process for
recovering the assets transferred from BPN to the three state-owned special
purpose vehicles through the outsourcing to a professional third party of the
management of the assets, with a mandate to gradually recover the assets over
time. The Portuguese Government shall select the party managing the credits
through a competitive bidding process and include adequate incentives to
maximise the recoveries and minimise operational costs into the mandate. The
Portuguese Government shall ensure timely disposal of the subsidiaries and the
assets in the other two state-owned special purpose vehicles;

(f)           on the basis of the set of
preliminary proposals to encourage the diversification of financing
alternatives to the corporate sector presented, develop
and implement solutions that provide financing alternatives to traditional bank
credit for the corporate sector. The Portuguese
Government shall assess the effectiveness of government-sponsored export credit
insurance schemes with a view to taking appropriate measures compatible with EU
law to promote exports;

(g)          ensure the initial and periodical
funding arrangements for the Resolution Fund in two steps, first by the
approval of a decree-law on the banks' contributions to the Resolution Fund,
and secondly by the approval of a supervisory notice on the specific periodic
contributions by banks; adopt the supervisory notices on the resolution plans.
The implementation of the recovery and resolution plans of the banks shall give
priority to those that are of systemic importance;

(h)          implement the framework for
financial institutions to engage in out-of-court debt restructuring for
households, smoothen the application for restructuring of corporate debt and
implement an action plan to raise public awareness of the restructuring tools;

(i)           submit to Parliament amendments
to the legal framework governing access to public capital to allow the State,
under strict circumstances and in accordance with state aid rules, to exercise
control over an institution and to perform mandatory recapitalisations.'

Article 2

This Decision is addressed to Portugal.

Article 3

This Decision shall be published in the Official Journal of the European Union.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 118, 12.5.2010, p. 1.