Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision 2011/344/EU on granting Union financial assistance to Portugal
Date: 2011-08-23
Institutions: European Commission
Subjects: Community loan, European Central Bank, European Union, Portugal, economic policy, financial intervention, financial planning, public debt, short-term monetary support, stability programme

EUROPEAN COMMISSION 

Brussels, 23.8.2011 
COM(2011) 523 final 

2011/0227 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

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

 
 
  
 
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  first  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.  

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2011/0227 (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 mechanism1, and in particular Article 3(2) thereof, 

Having regard to the proposal from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

Upon  a  request  by  Portugal,  the  Council  granted  financial  assistance  to  Portugal  (Council 
Implementing  Decision  2011/344/EU  of  17  May  2011)  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  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 first review of the authorities' progress on the implementation of the 
agreed measures as well as their effectiveness and economic and social impact. 

Under the Commission's current projections for nominal GDP growth (-0.7% in 2011, 0.0% in 
2012,  2.5%  in  2013  and  3.9%  in  2014),  the  fiscal  adjustment path  is  in line with  the Council 
Recommendation to Portugal of 2 December 20092 pursuant to Article 126(7) of the Treaty and 
is consistent with a path for the debt-to-GDP ratio of 101.1% in 2011, 106.2% in 2012, 107.3% 
in 2013 and 106.4% 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.  

(4) 

The quarterly quantitative performance criterion on the general government cash balance for the 
first  half  of  2011  was  met.  However,  recent  data  pointed  to  an  opening  gap  between  fiscal 

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OJ L 118, 12.5.2010, p. 1. 
15759/09 

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trends  and  the  2011  deficit  targets.  Expenditure  overruns  in  the  first  half  of  the  year, 
underperforming  non-tax  revenue,  the  reclassification  of  some  operations  led  to  a  projected 
shortfall of about 1.1 percent of GDP over the whole of 2011. The net costs related to the sale of 
Banco  Português  de  Negócios  (BPN)  would  add  another  0.2  percent  of  GDP  to  the  headline 
deficit. The authorities have reacted promptly. Budget execution has been tightened, a one-time 
surcharge on the personal income tax has been introduced, increases in the VAT rates of natural 
gas  and  electricity  have  been  brought  forward  from  2012  and  sales  of  concessions  will  be 
stepped  up.  The  authorities  should  also  endeavour  to  adopt  other  consolidation  measures  of  a 
permanent nature and/or frontload other measures planned for next year. The ongoing process 
of  a  phased  transfer  of  banks  pension  funds  to  the  State  social  security  system  should 
exceptionally provide a buffer towards meeting the deficit target for 2011. The acquired assets 
of  these  pension  funds  should  not  be  used  in  a  way  detrimental  to  long-term  fiscal 
sustainability.  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  the  European  Commission  services  and  the  International  Monetary 
Fund staff.  

Banks  are  working  towards  meeting  the  higher  capital  requirements  as  required  by  the 
programme.  Existing  legislation  is  being  amended  to  strengthen  the  augmented  solvency 
support  facility.  A  balanced  and  orderly  deleveraging  of  the  banking  sector  remains  critical, 
while  safeguarding  adequate  credit  for  dynamic  sectors  to  spur  growth.  A  buyer  for  BPN  has 
been  found  although  the  deal  still  needs  clearance  from  the  EU  competition  authorities. 
Progress has also been made to strengthen the supervisory and regulatory framework, including 
via  technical  assistance.  Portuguese  banks  passed  the  July  2011  European  Banking  Authority 
(EBA) stress tests with mixed results reinforcing the need to implement the programme reforms 
to strengthen the sector. 

Notwithstanding the relatively large first disbursement, 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.  

Progress in labour and product market reforms is essential to restore competitiveness and raise 
growth  potential.  In  this  respect,  the  special  rights  of  the  state  in  private  companies  were 
abolished ahead of schedule. The privatisation programme is being accelerated and broadened. 
A  severe  and  urgent  restructuring  of  SOEs  is  at  the  top  of  the  government's  agenda.  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.  Progress  is  being  made  in  preparation  for  a  budget-neutral  so-called  fiscal 
devaluation,  and  authorities  remain  committed  to  take  a  major  first  step  in  this  area  with  the 
2012 Budget.  

(5) 

(6) 

(7) 

(8) 

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

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HAS ADOPTED THIS DECISION:  

Article 1 

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

(1) in paragraph 5, points (a), (b) and (c) are replaced by the following: 

Portugal  shall  implement  fully  the  fiscal  consolidation  measures  foreseen  in  the  2011  budget 
'(a) 
amounting to around EUR 9 billion and the additional consolidation measures that the government has 
announced since then. To offset adverse budgetary trends and emerging risks to the achievement of the 
2011 deficit target, Portugalshall tighten budgetary execution,implement the already approved one-time 
surcharge in the contexty of the personal income tax in 2011, frontload from 2012 to 1 October 2011 
the  increase  in  the  VAT  rate  for  natural  gas  and  electricity  and  step  up  sales  of  concessions.  The 
government shall also endeavour to adopt other consolidation measures of a permanent nature and/or 
frontload other measures planned for 2012.The ongoing process of a phased transfer of banks pensions 
funds to the State social security system shall exceptionally provide a buffer towards reaching the 2011 
fiscal deficit target. The acquired assets of these pension funds shall not be used in a way detrimental to 
long-term sustainability. '  

'(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,  prepare  a  medium-term  fiscal  strategy  and  establish  an 
independent Fiscal Council. The budgetary framework at local and regional levels shall be considerably 
strenghtened,  in  particular  by  aligning  the  respective  financing  laws  to  the  requirements  of  the 
Budgetary  Framework  Law.  Portugal  shall  step  up  reporting  and  monitoring  of  public  finances,  in 
particular  arrears;  it  shall  set  up  a  strategy  for  the  settlement  of  arrears,  and  reinforce  budgetary 
execution rules and procedures. Portugal shall start the systematic and regular analysis of fiscal risks as 
part of the budget process, including the risks stemming from Public Private Partnerships (PPPs) and 
SOEs.' 

Portugal shall continue strengthening labour market functioning, notably by taking measures to 

'(c) 
reform employment protection legislation, wage setting and active labour market policies.' 

(2) in 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  do  not  conclude,  in  a 
shareholder  capacity,  shareholder  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. ' 

(3) in paragraph 5, points (g) and (h) are added: 

'(g) 
Portugal shall adopt measures to improve the efficiency and sustainability of SOEs at central, 
regional and local level. Portugal shall prepare a comprehensive SOEs strategy document reviewing the 
tariff  structure  and  the  service  provision  and  a  plan  to  tighten  borrowing  requirements  as  of  2012. 

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Portugal  shall  implementongoing  plans  to  reduce  operational  costs  by  at  least  15%  on  average  in 
central  government  SOEs  outside  the  health  sector  and  prepare  an  equivalent  plan  for  regional  and 
local government SOEs.' 

'(h) 
Portugal  shall  implement  the  privatisation  programme.  In  particular,  public  sector  shares  in 
EDP,  REN  and  GALP,  and,  if  market  conditions  permit,  TAP,  shall  be  sold  in  2011.  A  strategic 
privatisation plan for Parpublica shall be prepared. The privatisation plan through 2013 shall also cover 
Aeroportos de Portugal, the freight branch of CP, Correios de Portugal and Caixa Seguros, as well as a 
number of smaller firms. .' 

(4) in paragraph 6, points (a) and (b) are replaced by the following: 

'(a) 
The 2012 budget shall include a budget neutral recalibration of the tax system with a view to 
lowering  labour  costs  and  boosting  competitiveness.  The  reform  shall  be  developed  in  consultation 
with the EC, IMF and ECB. ' 

The  measures,  defined  in  recitals  (c)  and  (d),  amounting  to  at  least  EUR  5.1  billion,  shall  be 
'(b) 
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  2011.  The  government  shall  prepare  an 
updated  assessment  of  the  budgetary  situation  and  prospects  in  view  of  the  discussion  of  the  2012 
Budget with the EC, IMF and ECB before its approval by the government. ' 

(5) in paragraph 8, points (a) and (b), and (c)are replaced by the following: 

Encourage  banks  to  strengthen  their  collateral  buffers  and  monitor  the  issuance  of  the 
'(a) 
government guaranteed bank bonds, which has been authorised up to EUR 35 billion in line with EU 
State aid rules. ' 

Follow closely the plans presented by the banks to reach a core Tier 1 ratio of 9 percent by end-
'(b) 
2011 and 10 percent at the latest by end-2012. If banks cannot reach the capital requirement thresholds 
on  time,  they  might  temporarily  require  public  provision  of  equity  for  private  banks  through  the 
established EUR 12 billion bank solvency support facility. ' 

‘(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 target a reduction in the 
loan-to-deposit ratio to about 120 percent and a reduction of the reliance on Eurosystem funding during 
the duration of the programme. The Bank of Portugal should ask banks to revise their funding plans by 
end-September. These funding plans shall be reviewed quarterly, starting from the second progamme 
review.  The  Bank  of  Portugal  shall  take  appropriate  action  in  case  of  deviations  from  the  banks’ 
funding plans.’ 

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

Ensure  that  the  state-owned  Caixa  Geral  de  Depositos  (CGD)  is  streamlined  to  increase  the 
'(e) 
capital  base  of  its  core  banking  arm  as  needed.  The  necessary  resources  to  increase  the  capital  base 
should come from within the group.; Complete the sale of Banco Português de Negócios (BPN) after 
clearance from the European Commission in accordance with competition and State aid rules. ' 

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This Decision is addressed to the Portuguese Republic.  

Article 2 

Article 3 

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

Done at Brussels,  

For the Council 
The President 

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