# EUR-Lex - 52011PC0872 - EN

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# 52011PC0872

**Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision 2011/344/EU on granting Union financial assistance to Portugal /* COM/2011/0872 final - 2011/0425 (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(9) of Decision 2011/344/EU,
the Commission, together with the IMF and in liaison with the ECB, has conducted
the second 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 limited 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.

2011/0425 (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)
Upon a request by Portugal, the Council granted
financial assistance to Portugal (Council Implementing
Decision 2011/344/EU as amended) 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.

(2)
Under the Commission's current projections for nominal
GDP growth (-0.6% in 2011, -1.9% in 2012, 1.9% in 2013 and 3.9% in 2014), the
fiscal adjustment path is in line with the Council Recommendation to Portugal
of 2 December 2009[2]
pursuant to Article 126(7) of the Treaty, and consistent with a path for the debt-to-GDP
ratio of 107.2% in 2011, 116.2% in 2012, 118.1% in 2013 and 116% in 2014. The
debt to GDP ratio would therefore be stabilised in 2013 and be placed on a
declining path thereafter, 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 (SOEs) and
differences between accrued and cash interest payments.

(3)
The quarterly quantitative performance criterion
on the general government cash balance for the second quarter of 2011 was met
and preliminary data suggest that this was also the case in the third quarter of
2011. However, with the information available as of early November, on a European
Systems of Accounts (ESA95) basis, a budgetary gap of around 11⁄2 percent of GDP
is projected for 2011 as a whole. Part of this fiscal gap had been ascertained
by August, notably due to current expenditure overruns, lower-than-projected
current non-tax revenue and higher-than-budgeted capital spending. The
Government had taken some measures to narrow this gap, namely a one-time
surcharge in the personal income tax and an increase in the VAT rate for
natural gas and electricity, which was brought forward to 1 October 2011 from
2012. But these measures were not sufficient to close the fiscal gap,
particularly as further slippages have been identified more recently, including
hihger interest payment, lower-than-projected capital revenue and sales of real
estate. The Government is seeking an agreement with the banks on a partial transfer
of their pension funds to the State social security system, to be undertaken in
full compliance with the EU state aid rules, and to be used exceptionally to meet
the deficit target of 5.9 percent of GDP in 2011. The Government agreed not to rely
on further transfers of pension funds to meet the programme targets for the
coming years.

(4)
Progress is being made to strengthen public
financial management through improved reporting and monitoring, and reforming
the budgetary framework in line with the recommendations from European
Commission services and International Monetary Fund staff.

(5)
The stock of arrears will be significantly
reduced over the program period. To
this end, a strategy for the validation and settlement of
arrears for the entities inside the general government as well as for SOEs
classified outside the general government will be prepared. In this strategy, a
roadmap will be provided which sets out how and when the stock of arrears will
be stabilised. Moreover, various options of settling arrears will be explored,
providing appropriate incentive mechanisms including the potential of rebates
for early settlements and rewarding entities
that no longer accumulate new arrears.

(6)
Given the significant drag that the Autonomous
Region of Madeira (RAM) has exerted on Portuguese public finances, the
Government will prepare a financial arrangement with this region with a view to
containing the high level of fiscal risks still remaining. The arrangement will
be designed in line with the economic adjustment programme agreed between the
Republic of Portugal and the European Union and the International Monetary Fund
and comprise, among others, a debt sustainability
analysis.

(7)
Portuguese banks work towards meeting the higher
capital requirements as stipulated by the programme, taking also into account
the implications deriving from the European Banking Authority requirements of
valuing sovereign debt at market prices, the special on-site inspection
programme (SIP) and the transfer of banks' pension funds to the social security
system. A legal framework, the purpose of which is to provide temporary public
support to banks, is under preparation. A balanced and orderly deleveraging of
the banking sector remains critical, while safeguarding adequate credit for the
productive sectors of the economy. The sale of Banco Português de Negocios is
in its final stage although the transaction still needs clearance from the EU
competition authorities. Progress has also been made to strengthen the
supervisory and regulatory framework, including via technical assistance.

(8)
Progress in labour and product market reforms is
essential to restore competitiveness and raise the growth potential. Labour
market reforms to align the protection and rights under fixed and open-ended
contracts and to establish an employer-financed fund for paying out workers’
severance entitlements are advancing. The privatisation programme is being implemented
under the new framework law for privatisation. A deep and urgent restructuring
of SOEs is at the top of the government's agenda. Further progress will be
needed to lower entry barriers to the sheltered sectors with a view to fostering
competiton and reduce excessive rents. Structural
reforms need to be implemented decisively and closely monitored.

(9)
Notwithstanding the relatively large first and
second disbursements, the government's cash position remains under strain. This
is explained by increasing financing needs from SOEs, a sharp increase in
households' redemption of savings certificates, and persisting financial market
stress.

(10)
In light of these developments, Council
Implementing Decision 2011/344/EU should be amended,

HAS ADOPTED THIS DECISION:

Article 1

Article 3 is amended as follows:

(1) paragraph 3 is replaced by the
following:

'3.           The
general government deficit shall not exceed EUR 10,068 million
(equivalent to 5.9% of GDP based on current projections) in 2011, EUR 7,645
million (41⁄2% of GDP) in 2012 and 3% of GDP by 2013 in line with the Excessive
Deficit Procedure (EDP) requirements. For the calculation of this
deficit, the possible budgetary costs of bank support measures
in the context of the government's financial sector strategy shall not be taken
into account. Consolidation shall be achieved by means of high-quality permanent measures and
minimising the impact of consolidation on vulnerable groups.'

(2) paragraph 5, point (a) is replaced
by the following:

' (a)   2011 fiscal
deficit target shall be reached by an exceptional
measure. Assets acquired as a
result of the transfer of banks' pensions funds to the State social security
system shall not be used in a way detrimental to
long-term sustainability of Portuguese public finances.'

(3) paragraph 5, point (b) is replaced
by the following:

'(b)    Portugal shall adopt measures to
reinforce public finance management. Portugal shall implement the measures
foreseen in the new Budgetary Framework Law, including setting-up a medium-term
budgetary framework and establishing an independent Fiscal Council. The
budgetary framework at local and regional levels shall be considerably
strenghtened, in particular by putting forward the key options for the alignment
of the respective financing laws to the requirements of the Budgetary Framework
Law. Portugal shall step up reporting and monitoring of public finances and
reinforce budgetary execution rules and procedures. The government will prepare
a strategy for the validation and settlement of arrears which will present a roadmap setting out how
and when the stock of arrears will be stabilised and explore various options of
settling arrears. Regarding Public Private Partnerships (PPP),
the Governement will not enter into any new PPPs before the study results on
existing PPPs envisaged in the Programme and the legal and institutional
reforms proposed become available.'

(4) paragraph 5, point (e) is replaced
by the following:

'(e)    Portugal shall continue opening up the
economy to competition. The government shall take the necessary measures to
ensure that the Portuguese State or any public body does not conclude, in a
shareholder capacity, agreements which may hinder the free movement of capital
or influence the management control of companies. The new Privatisation Law shall
also be respectful to the principles of free movement of capital and not grant
or allow special rights to the State. A revision of competition law shall be
undertaken aiming at improving the speed and effectiveness of enforcement of
competition rules.'

(5) paragraph 5, point (h) is replaced
by the following:

' (h)   Portugal shall prepare a financial
arrangement with the Autonomous Region of Madeira (RAM) consistent with the
financial programme between Republic of Portugal and the European Union and the
International Monetary Fund. Until the agreement of this arrangement and its
implementation in the RAM budget, Portugal shall closely monitor the execution
of the RAM budget, will keep transfers from the State to the RAM government
suspended and will not honour any new commercial or financial debt or
guarantees by the RAM government and its SOEs that are not approved by the
Ministry of Finance.'

(6) paragraph 6, point (a) is replaced
by the following:

' (a)   Portugal shall implement the
privatisation programme. In particular, the sale of public sector shares in EDP
shall be completed in 2012. In addition, the public sector shares in REN and
GALP, and, if market conditions permit, TAP, shall be sold in 2012. A strategy
for Parpublica shall be prepared, reconsidering the role of Parpublica as a
public company and considering the possibility of winding down the company or consolidating
it with the general government. The privatisation plan through 2013 shall also
cover Aeroportos de Portugal, the freight branch of Comboios de Portugal,
Correios de Portugal and Caixa Seguros, as well as a number of smaller firms.'

(7) paragraph 6, point (b) is replaced
by the following:

'(b)    The measures, defined in points (c)
and (d), amounting to at least EUR 8.8 billion, shall be included in the 2012
Budget. Further measures, mostly on the expenditure side, shall be taken to
fill any possible gap arising from budgetary developments in 2012. '

(8) paragraph 6, point (c) is replaced
by the following:

'(c)    The budget shall provide for a
reduction of expenditure in 2012 of at least EUR 6.7 billion
including a reduction in public sector wages and employment; cuts in pensions; a
comprehensive reorganisation of the central administration, eliminating
duplicities and other inefficiencies; reducing the number of municipalities and
parishes; cuts in education and health; lower transfers to regional and local
authorities; and reductions in capital expenditure and in other expenditure as set
out in the Programme.'

(9) paragraph 6, point (d) is replaced
by the following:

'(d)    On the revenue side, the budget shall
include revenue measures totalling around EUR 2.1 billion in a full
year, including by broadening VAT bases through reducing exemptions and
rearranging the lists of goods and services subject to reduced, intermediate
and higher rates; an increase in excise taxes; broadening the corporate and
personal income tax bases by reducing tax deductions and special regimes;
ensuring the convergence of personal income tax deductions applied to pensions
and labour income; and changes in property taxation by substantially reducing
exemptions. These measures shall be complemented by action to fight tax evasion,
fraud and informality. '

(10) paragraph 6, point (j) is replaced
by the following:

' (j)    Portugal shall promote wage
developments consistent with the objectives of fostering job creation and
improving firms' competitiveness with a view to correct macroeconomic
imbalances. Over the programme period, any increase in minimum wages will take
place only if justified by economic and labour market developments. Measures
shall be taken to address weaknesses in the current wage bargaining schemes,
including legislation to redefine the criteria and modalities of the extension
of collective agreements and to facilitate firm-level agreements. Until then,
the application of extensions will be suspended.'

(11) paragraph 6, point (k) is replaced
by the following:

'(k)    An action plan shall be prepared to
improve the quality of secondary and vocational education and training.'

(12) paragraph 6, point (o) is added:

' (o)   Local govermnemnt administration in
Portugal has currently 308 municipalities and 4 259 parishes. Portugal shall
develop a consolidation plan to reorganise and significantly reduce the number
of such entitites. These changes will come into effect by the beginning of the
next local elections cycle. '

(13) paragraph 6, point (p) is added:

'(p)     Portugal shall adopt measures to ensure the sustainability
of the national electricity system leading to the elimination of the tariff
debt by 2020 and ensuring it will stabilise by 2013. These measures shall
correct excessive rents and cover all their sources.'

(14) paragraph 7, point (a) is replaced
by the following:

'(a)    The 2013 budget shall include fiscal
consolidation measures amounting to at least EUR 3.4 billion aiming
at a reduction of the general government deficit within the timeframe referred
to in Article 3(3). '

(15) paragraph 7, point (b) is replaced
by the following:

'(b)    The budget shall include revenue
measures including notably further broadening of corporate and personal income
tax bases, higher excises taxes and changes in property taxation, yielding
close to EUR 0.7 billion of additional revenue. '

(16) paragraph 7, point (d) is added:

'(d)    On the expenditure side, the budget
shall provide for a reduction of at least EUR 2.7 billion, including:
reducing expenditures in the central administration, education and health;
transfers to local and regional authorities; reduction of the number of employees
in the public sector; and lower costs by SOEs. '

(17) paragraph 7, point (e) is added:

'(e)    Portugal shall improve the business
environment by reducing administrative burden through the extension of
simplification reforms (Points of Single Contact and "Zero
authorisation" projects) to all sectors of the economy; and by alleviating
credit constraints of small and medium-sized enterprises, including through the
implementation of Directive 2011/7/EU on combating late payment in commercial
transactions. '

(18) the first two sentences of paragraph
8 are replaced by the following:

'8.           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 develop and agree with the European Commission, the ECB and the
IMF a strategy for the future structure and functioning of the Portuguese banking
sector so that financial stability is preserved. In particular, Portugal shall:'

(19) paragraph 8, point (a) is replaced
by the following:

(a)     Advise banks to strengthen their
collateral buffers on a sustainable basis and monitor the issuance of the
government guaranteed bank bonds, which has been authorised up to EUR 35
billion in line with Union State aid rules;

(20) paragraph 8, point (b) is replaced
by the following:

' (b)   Follow closely the plans presented by
the banks to reach a core Tier 1 ratio of 9 percent by end-2011 and 10 percent
at the latest by end-2012. The capital requirements stemming from valuing
sovereign debt based on market prices according to the European Banking
Authority will be met in June 2012 together with the capital implications from
the special on-site inspection programme and the transfer of the banks' pension
funds to the social security system. Banks will present in February 2012 plans
how they intend to reach their capital needs in that year. If banks cannot
reach the capital requirement thresholds on time, they might temporarily
require public provision of capital, which for privately owned banks will be
available through the EUR 12 billion bank solvency support facility established
under the economic adjustment programme agreed between the Republic of Portugal
and the European Union and the International Monetary Fund;'

(21) paragraph 8, point (c) is replaced
by the following:

'(c)    Ensure a balanced an orderly
deleveraging of the banking sector, which remains critical to eliminating
funding imbalances on a permanent basis. Banks’ funding plans aim at a
reduction in the loan-to-deposit ratio to around 120% by the end of the programme
and a reduction of the reliance on Eurosystem funding during the duration of
the programme. These funding plans shall be reviewed quarterly, with the next
one due before the third Programme review. The Bank of Portugal shall take
appropriate action in case of deviations from the banks’ funding plans;'

(22) paragraph 8, point (d) is replaced
by the following:

'(d)    Complete the sale of Banco Português
de Negócios respecting the Union State aid rules;'

(23) paragraph 8, point (e) is replaced
by the following:

'(e)    Ensure that the state-owned Caixa
Geral de Depositos (CGD) is streamlined to increase the capital base of its
core banking arm as needed in 2011 without relying on the sale of its insurance
arm. This sale is expected to take place in 2012 directly to a final buyer and
to contribute to meeting that year’s additional capital needs. Insofar as these
needs cannot be met from internal group sources, CGD will be provided with
government capital support outside of the bank solvency support facility.'

(24) paragraph 8, points (f), (g), (h)
and (i) are added:

'(f)     Ensure that the partial transfer of
the banks’ pension funds to the social security system is done under actuarially
balanced conditions, also respecting EU competition and state aid rules. In
order to avoid having to take recourse to the bank solvency support within the
programme financing envelope, the government will offer help banks to cover the
impact of the transfer on capital by using part of the transfer to acquire
common equity in the banks. The remainder of the transferred funds will be deposited
in a blocked account until the completion of the third review.

(g)     Finalise the legal framework for
access to capital from public sources by end-January 2012 consistent with Union
state aid rules and in line with the principles laid down in the Memorandum of
Understanding.

(h)     Ensure that before the third Programme
review banks have incorporated the available results of the special on-site
inspections programme in the stress test exercise with a 6 percent Core Tier 1
threshold;

(i)      Complete the legal
framework for early intervention, resolution, and
deposit insurance for banks by end-2011 and by the same deadline the one for corporate and household debt restructuring.'

(25) paragraph 9 is replaced by the
following:

'9.           In order to ensure the
smooth implementation of the Programme's conditionality, and to help to correct
imbalances in a sustainable way, the Commission shall provide continued advice
and guidance on fiscal, financial market and structural reforms. Within the
framework of the assistance to be provided to Portugal, together with the IMF
and in liaison with the ECB, it shall periodically review the effectiveness and
economic and social impact of the agreed measures, and shall recommend
necessary corrections with a view to enhancing growth and job creation,
securing the necessary fiscal consolidation and minimising harmful social
impacts, particularly on the most vulnerable parts of the Portuguese society.'

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.

[2]               15759/09