Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision 2011/344/EU on granting Union financial assistance to Portugal
Date: 2012-03-19
Institutions: European Commission
Subjects: Portugal, administrative reform, budget deficit, financial intervention, financial planning, privatisation, public debt, stability programme, structural adjustment, tax reform

EUROPEAN COMMISSION 

Brussels, 19.3.2012  
COM(2012) 142 final 

2012/0071 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

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

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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  third  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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2012/0071 (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) 

In line with Article 3(9) 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  third  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. 

The review has found that compliance with the conditionality for the fourth quarter of 2011 
was satisfactory. In 2011, the general government deficit fell below the target of 5.9 per cent 
of  GDP  and  it  is  now  estimated  at  around  4  per  cent  of  GDP,  albeit  by  exceptionally 
resorting  to  a  transfer  of  the  bank's  pension  funds  to  the  public  social  security  system  of 
about  EUR  6  billion  (about  3½  per  cent  of  GDP).  The  2012  budget  is  consistent  with 
meeting the deficit target of 4½ per cent of GDP in line with the programme. Policy efforts 
to support financial system stability continue. Portuguese banks work towards meeting the 
higher  capital  requirements  as  required  by  the  programme  taking  into  account  the 
implications of the European Banking Authority's requirement of valuing sovereign debt at 
market  prices, the special on-site inspection programme and the transfer of banks' pension 
funds to the social security system. Labour and product market reforms are also progressing: 
an  agreement  was  reached  with  social  partners  on  a  broad  and  ambitious  labour  market 
reform  and  a  significant  revision  of  the  competition framework law has been submitted to 
Parliament  which  will  create  conditions  for  an  effective  competition  enforcement  regime. 
The privatisation programme is being implemented under the new framework law. The sale 
of  the  energy  company  (EDP)  and  the  energy  network  company  (REN)  are  concluded;  a 
strategy to restructure state-owned enterprises is put in place. The public procurement legal 
framework is being improved and the modernisation of the housing market legal framework 
is underway. The reform of the judicial system is making good progress.  

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OJ L 118, 12.5.2010, p. 1. 

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HAS ADOPTED THIS DECISION:  

Article 1 

In Article 3 

(1) paragraph 6 is replaced by the following: 

'6.  Portugal  shall  adopt  the  following  measures  during  2012,  in  line  with  specifications  in  the 
Memorandum of Understanding: 

(a) The measures defined in points (b) and (c), amounting to at least EUR 9.8 billion, shall 
be included in the 2012 budget. Further measures, notably on the expenditure side, shall be 
taken  to  fill  any  possible  gap  arising  from  budgetary  developments  in  2012.  The 
government  will  adopt  a  supplementary  budget  in  March  which  incorporates  various 
elements such as the implications of the banks' pension funds transfer to the public social 
security, the agreement with the Autonomous Region of Madeira, the fiscal impact of the 
deterioration  in  the  economic  outlook,  lower  interest  payments  and  the  strategy  for  the 
settlement of arrears. The supplementary budget will leave the target for the 2012 general 
government deficit (corresponding to 4½ per cent of GDP) unchanged.  

(b)  Portugal  shall  aim  at  a  reduction  of  expenditure  in  2012  of  at  least  EUR  6.8  billion 
including  a  reduction  in  public  sector  wages  and  employment;  cuts  in  pensions;  a 
comprehensive reorganisation of the central administration, eliminating redundancies and 
other inefficiencies; reducing transfers to state-owned enterprises; 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.  

(c) On the revenue side, Portugal shall implement revenue measures totalling around EUR 
3 billion, including 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. 

(d) Portugal shall adopt measures to reinforce public finance management. Portugal shall 
implement  the  measures  provided  for  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 
strengthened,  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  Portuguese  Government  shall  prepare  a  strategy  for 
the validation and settlement of arrears. The strategy will lay out the prioritisation criteria 
for paying creditors, as well as governance arrangements to ensure a fair and transparent 
settling  process  across  all  sectors.  Portugal  shall  put  in  place  a  strengthened  legal  and 
institutional  framework  for  assessing  fiscal  risks  prior  to  engaging  in  a  PPP  contract. 
Similarly, Portugal shall adopt a law to regulate the creation and the functioning of state-
owned  enterprises  (SOEs)  at  the  central,  regional  and  local  levels.  Portugal  shall  not 

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engage  in  any  new  PPP  contract  or  create  an  SOE  until  the  reviews  and  the  new  legal 
structure are in place. 

(e) Local government administration in Portugal has currently 308 municipalities and 4259 
parishes. Portugal shall develop a consolidation plan to reorganise and significantly reduce 
the number of such entities. These changes will come into effect by the beginning of the 
next local election cycle. 

(f)  Portugal  shall  modernise  the  revenue  administration  by  creating  a  single  entity, 
reducing the number of municipal offices and addressing remaining bottlenecks in the tax 
appeal system. 

(g)  Portugal  shall  implement  the  financial  arrangement  with  the  Autonomous  Region  of 
Madeira. 

(h) Portugal shall adopt measures to improve the efficiency and sustainability of SOEs at 
central, regional and local level. Portugal shall implement a strategy to restructure, reduce 
the  indebtedness  of  SOEs  and  to  ensure  improved  conditions  for  market  financing. 
Portugal shall implement this strategy to reach operational balance at sector level by end-
2012. 

(i)  Portugal  shall  continue  implementing  the  privatisation  programme.  In  particular,  in 
2012 the public sector shares in GALP, TAP and ANA shall be sold and the privatisation 
of the freight branch of Comboios de Portugal, Correios de Portugal as well as a number of 
smaller firms shall be launched. A strategy for 'Parpublica' shall be prepared, considering 
its winding down or consolidation with the general government. 

(j)  Portugal  shall  implement  legislation  to  reform  the  unemployment  insurance  system, 
including a reduction of the maximum duration of unemployment insurance benefits, a cap 
on  unemployment  benefits  to  2.5  times  the  social  support  index,  a  reduction  in  benefits 
over  the  unemployment  spell,  a  reduction  of  the  minimum  contributory  period,  and  an 
extension to certain categories of self-employed.  

(k) The government shall prepare a proposal to align the system for severance payments to 
reduce its level to the EU average of 8-12 days per year of work and create a compensation 
fund for severance payments.  

(l)  Regulations  on  overtime  pay  shall  be  eased  and  increased  flexibility  of  working  time 
arrangements. 

improving  firms’  competitiveness  with  a  view 

(m) Portugal shall promote wage developments consistent with the objectives of fostering 
job  creation  and 
to  correcting 
macroeconomic imbalances. Over the Programme period, any increase in minimum wages 
shall 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  shall  be 
suspended. 

(n) Active labour market policies shall be strengthened after a review of current practices 
and an agreed action plan. 

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

(p) The functioning of the judicial system shall be improved by implementing the measures 
proposed  under  the  Judicial  Reform  Map  and  by  conducting  and  auditing  of  the  backlog 
cases in order to target measures to eliminate court backlog and foster alternative dispute 
settlements. 

(q)  Portugal  shall  continue  opening  up  the  economy  to  competition.  The  Portuguese 
Government shall take the necessary measures to ensure that obstacles to free movement of 
capital will not be created by their action and in particular, 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. 
Professional  services  shall  be  liberalised  by  improving  the  professional  qualification 
framework  and  by  eliminating  restrictions  on  regulated  professions.  In  construction  and 
real estate activities, Portugal shall make the requirements for cross border providers less 
burdensome and review obstacles to the establishment of services providers.  

(r) The competition and regulatory framework shall be improved. Portugal shall reinforce 
the independence and resources of the main national regulator authorities; implement the 
draft competition law with a view to improving the speed and effectiveness of enforcement 
of  competition  rules;  and  make  operational  the  specialised  court  for  Competition, 
Regulation and Supervision.  

(s)  In  the  energy  sector,  Portugal  shall  take  measures  to  facilitate  entry,  promote  the 
establishment  of  the  Iberian  gas  market  and  shall  take  further  steps  towards  the  full 
transposition of the Third EU Energy Package. Portugal shall take measures to review the 
support  and  compensation  schemes  for  the  production  of  electricity.  Portugal  shall  take 
measures to reduce excessive rents and eliminate the tariff debt ('defice tarifário') by 2020, 
focusing  on  compensation  schemes  for  power  guarantee,  special  regime  (renewables  - 
excluding  those  granted  under  tender  mechanisms  -  and  cogeneration),  and  the  ordinary 
regime ('CMECs' and 'CAEs').  

(t)  In  other  network  industries,  in  particular  transport,  telecommunications  and  postal 
services, Portugal shall adopt additional measures to promote competition and flexibility. 

(u)  Portugal  shall  adopt  the  revised  public  procurement  code  thereby  contributing  to  a 
more competitive business environment and to more efficient public spending.  

(v)  Portugal  shall  implement  legislation  on  housing  rental  market  to  further  balance 
obligations of tenants and landlords, to increase incentives for renovation and to make the 
market more flexible and dynamic.' 

(2) 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 10 % at 
the  latest  by  end-2012.  The  capital  requirements  stemming  from  valuing  sovereign  debt 
based on market prices according to the European Banking Authority shall be met in June 
2012 together with the capital implications from the special on-site inspections programme 
and  the  transfer  of  the  banks’  pension  funds  to  the  State  social  security  system.  If  banks 
cannot  reach  the  capital  requirement  thresholds  on  time,  they  might  temporarily  require 
public provision of capital, which for privately owned banks shall be available through the 
EUR 12 billion bank solvency support facility established under the Programme.' 

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

'(c)  ensure  a  balanced  and  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 an indicative value of around 120 % by the end 
of the Programme and a eventually reduction of the reliance on Eurosystem funding during 
the duration of the Programme. These funding plans shall be reviewed quarterly.' 

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

'(e) ensure that the state-owned Caixa Geral de Depósitos (CGD) is streamlined to increase 
the capital base of its core banking arm as needed. The sale of its insurance arm is expected 
to  take  place  in  2012  directly  to  a  final  buyer  and  to  contribute  to  meeting  that  year’s 
additional  capital  needs,  while  CGD  will  continue  efforts  to  divest  non-strategic  assets. 
Insofar as these needs cannot be met from internal group sources by end-June 2012, CGD 
shall  be  provided  with  government  capital  support  from  cash  buffers  outside  the  bank 
solvency support facility.' 

(5) paragraph 8, point (f) is replaced by the following: 

'(f) ensure that the proceeds associated with the partial transfer of the banks’ pension funds 
to the State social security system will be used respecting Union State aid rules. Carry out, 
under strict eligibility criteria, a credit assignment of up to EUR 3 billion from the banks to 
the general government, while maintaining the contractual obligations of the debtor.' 

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

'(g)  develop  and  implement  a  more  effective  strategy  for  the  recovery  of  the  distressed 
assets  of  the  special  purpose  vehicles  with  the  objective  to  maximise  returns  for  the  tax 
payer within a reasonable timeframe.' 

(7) paragraph 8, point (i) is replaced by the following: 

'(i)  ensure  that  banks  have  incorporated  the  available  results  of  the  special  on-site 
inspections programme in the stress test exercise with a 6 % Core Tier 1 threshold.' 

(8) paragraph 8, point (j) is deleted. 

This Decision is addressed to Portugal.  

Article 2 

Article 3 

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

Done at Brussels,  

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For the Council 
The President 

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