Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision 2011/344/EU on granting Union financial assistance to Portugal
Date: 2012-06-27
Institutions: European Commission
Subjects: Community loan, European Central Bank, Portugal, administrative reform, banking system, educational reform, financial intervention, financial planning, judicial reform, public debt, short-term monetary support, stability programme, tax reform

EUROPEAN COMMISSION 

Brussels, 27.6.2012  
COM(2012) 364 final 

2012/0176 (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 fourth 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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2012/0176 (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  fourth  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  first  quarter  of  2012 
was  satisfactory.  In  2011,  the  general  government  deficit  was  4.2  per  cent  of  GDP.  The 
fiscal target of 4½ per cent of GDP for 2012 remains within reach. The rebalancing of the 
economy  has  continued  at  a  swift  pace  and  exports  have  outperformed  expectations  and 
more than offset weaker domestic demand. However, risks to the fiscal objectives related to 
the macro-economic outlook have started to materialise, with the growth composition tilting 
more  strongly  towards  net  exports  and  away  from  domestic  demand  and  in  view  of  the 
substantial  worsening  of  the  labour  market  situation.  Progress  in  labour  market  reforms 
needs to be sustained. Severance payments will be aligned with the EU average and a fund 
to finance part of severance payments will be created. A proposal to revise the mechanism 
for extending collective agreements is under preparation. Policy efforts to support financial 
system  stability  continue.  The  sale  of  Banco  Português  de  Negocios  (BPN)  has  been 
concluded  and  the  management  of  the  special  purpose  vehicles  will  be  optimised  to 
maximise the recovery of the assets transferred from BPN. The early intervention, resolution 
and  deposit  insurance  framework  has  been  strenghtened  and  the  authorities  are  asked  to 
prepare the implementing measures. Product market reforms, notably in sheltered services, 
is  essential  to  restore  competitiveness  and  promote  growth  and  employment.  The 
government is implementing a strategy to restructure state-owned enterprises to reduce their 
indebtedness and to insure improved conditions for market financing. A study to assess the 
costs  and  benefits  of  renegotiating  any  public-private  partnerships  (PPPs)  or  concession 
contracts  to  reduce  the  government  financial  obligations  is  being  prepared  by  an 

1 

OJ L 118, 12.5.2010, p. 1. 

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international auditing firm. The government is committed to ensure an effective competition 
enforcement  regime.  Housing  market  regulations  are  being  modernised  with  a  view  to 
promoting  geographical  mobility  and  the  reform  of  the  judicial  system  is  making  good 
progress. The privatisation programme is being implemented under the new framework law, 

HAS ADOPTED THIS DECISION:  

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

Article 1 

(1) 

Paragraph 6 is amended as follows: 

(a) 

point (a) is replaced by the following: 

'(a)  The  general  government  deficit  shall  not  exceed  4.5%  of  GDP  in  2012.  In 
addition to the measures specified in the 2012 budget and the supplementary budget 
approved in March, further measures, notably on the expenditure side, shall be taken 
to fill any possible gap in 2012.'; 

(b) 

point (d) is replaced by the following: 

'(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.  The  local  and  regional 
budgetary  frameworks  shall  be  considerably  strengthened,  in  particular  by  aligning 
the  respective  financing  laws  with  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 
implement the strategy for the validation and settlement of arrears. The strategy lays 
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 implement the new legal and institutional PPPs framework. Based on 
the  results  of  a  study  on  PPPs  renegotiations,  the  government  shall  renegotiate  the 
relevant  contracts.  Portugal  shall  adopt  a  law  to  regulate  the  creation  and  the 
functioning  of  state-owned  enterprises  (SOEs)  at  the  central,  regional  and  local 
levels.'; 

(c) 

point (e) is replaced by the following: 

'(e)  Portugal  shall  reorganise  and  significantly  reduce  the  number  of  local 
government  entities.  These  changes  will  come  into  effect  by  the  beginning  of  the 
next local election cycle.'; 

(d) 

point (f) is replaced by the following: 

'(f)  Portugal  shall  modernise  the  revenue  administration  by  completing  the 
implementation of the 'Autoridade Tributária e Aduaneira', reinforcing the links with 
the revenue collection units of the Social Security, reducing the number of municipal 
offices and addressing remaining bottlenecks in the tax appeal system.'; 

(e) 

point (h) is replaced by the following: 

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

(f) 

point (i) is replaced by the following: 

'(i)  Portugal  shall  continue  implementing  the  privatisation  programme.  The  direct 
sale of Caixa Geral de Depositos's insurance arm (Caixa Seguros) shall take place in 
2012. The privatisation process of the national air carrier (TAP), the airport operator 
Aeroportos de Portugal (ANA), the cargo handling subsidiary of CP (CP Carga) and 
of  Correios  de  Portugal  (CTT)  shall  start  in  2012  with  a  view  of  finalising  it  in 
2013.'; 

(g) 

point (j) is deleted; 

(h) 

point (k) is replaced by the following: 

'(k)  Portugal  shall  submit  draft  legislation  to  the  Portuguese  Parliament  to  align 
severance payments with the EU average of 8-12 days per year of work and create a 
compensation fund for severance payments.'; 

(i) 

point (l) is deleted; 

(j) 

point (o) is replaced by the following: 

'(o) Portugal shall implement the measures set out in its action plan to improve the 
quality of secondary and vocational education and training.'; 

(k) 

point (p) is replaced by the following: 

'(p)  The  functioning  of  the  judicial  system  shall  be  improved  by  implementing  the 
measures  proposed  under  the  judicial  reform  roadmap  and  by  applying  targeted 
measures to progressively eliminate court backlogs and to foster alternative dispute 
settlements.'; 

(l) 

point (r) is replaced by the following: 

'(r)  The  competition  and  regulatory  framework  shall  be  improved.  Portugal  shall 
reinforce the independence and resources of the main national regulatory authorities; 
implement the competition law with a view to improving the speed and effectiveness 
of enforcement of competition rules; and monitor the inflow of new cases and report 
on  the  functioning  of  the  specialised  court  for  Competition,  Regulation  and 
Supervision.'; 

(m)  point (u) and (v) are deleted. 

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(2) 

Paragraph 8 is 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  implement  the  strategy  for  the  Portuguese  banking  sector  agreed  with  the 
Commission, the ECB and the IMF a so that financial stability is preserved. In particular, 
Portugal shall: 

(a) 

(b) 

(c) 

(d) 

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; 

ensure that banks reach the programme target of the 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  EU-wide  recapitalisation  exercise  co-
ordinated by the the European Banking Authority shall be met in June 2012 together 
with  the  capital  implications  resulting  from  the  special  on-site  inspections 
programme and the transfer of the banks’ pension funds to the State social security 
system.  The  EUR  12  billion  bank  solvency  support  facility  established  under  the 
Programme should be made available if banks cannot reach the capital requirement 
thresholds within the deadlines set; 

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  eventually  a  reduction  of  the  reliance  on 
Eurosystem funding during the duration of the Programme. These funding plans shall 
be reviewed quarterly; 

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 
and  health  arms  shall  take  place  before  end-2012,  while  the  sale  of  non-strategic 
equity  stakes  is  ongoing.  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; 

(e)  optimise  the  process  for  recovering  the  assets  transferred  from  BPN  to  the  three 
state-owned  SPVs  through  the  outsourcing  of  the  management  of  the  assets  to  a 
professional  third  party,  with  a  mandate  to  gradually  recover  the  assets  over  time. 
Select  the  party  managing  the  assets  through  a  competitive  bidding  process  and 
include proper incentives to optimize the recoveries into the mandate; 

(f) 

(g) 

complete  a  proposal  for  encouraging  the  diversification  of  financing  alternatives  to 
the corporate sector by end-July 2012; 

implement measures to conclude the setting-up of the Resolution Fund with a view to 
ensuring that it is fully operational by July 2012; to adopt the supervisory notices on 
recovery plans by end-July 2012 and adopt the regulation on resolution plans by end-
October 2012, adopt the rules applicable to setting-up and operation of bridge banks 
in line with EU competition rules by end September 2012. Priority will be given to 
the review of the recovery and subsequent resolution plans of the banks that are of 
systemic importance; 

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(h) 

establish  a  framework  for  financial  institutions  to  engage  in  out-of-court  debt 
restructuring for households and SMEs.' 

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,  

For the Council 
The President 

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