Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision 2011/344/EU on granting Union financial assistance to Portugal
Date: 2011-12-02
Institutions: Council of the European Union
Subjects: Community loan, Portugal, deadline for payment, financial intervention, interest

EUROPEAN COMMISSION 

Brussels, 2.12.2011 
COM(2011) 872 final 

2011/0425 (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 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.  

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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 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  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. 

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 20092 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.  

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 1½ 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 

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

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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.  

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.  

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.  

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.  

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.  

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. 

(4) 

(5) 

(6) 

(7) 

(8) 

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(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 (4½% 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 

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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 
the  central  administration, 
in  pensions;  a  comprehensive  reorganisation  of 
eliminating  duplicities  and  other 
the  number  of 
reducing 
inefficiencies; 
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; 

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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. ' 

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(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 
the 
constraints  of  small  and  medium-sized  enterprises, 
implementation  of  Directive  2011/7/EU  on  combating  late  payment  in  commercial 
transactions. ' 

including 

through 

(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;' 

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(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.' 

This Decision is addressed to Portugal.  

Article 2 

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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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