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email article print articleAusterity and stabiliation package for Portugal

PORTUGAL:

MEMORANDUM OF UNDERSTANDING ON

SPECIFIC ECONOMIC POLICY CONDITIONALITY

3 May 2011, 13:40

[With regard to Council Regulation (EU) n° 407/2010 of 11 May 2010 establishing aEuropean Financial Stabilisation Mechanism, and in particular Article 3(5) thereof, thisMemorandum of Understanding details the general economic policy conditions as embedded in Council Implementing Decision […] of […] on granting Union financial assistance toPortugal. The quarterly disbursement of financial assistance from the European FinancialStabilisation Mechanism (EFSM)1 will be subject to quarterly reviews of conditionality forthe duration of the programme. The first review will be carried out in the third quarter of

2011, and the 12-th and last review in the second quarter of 2014. Release of the instalments will be based on observance of quantitative performance criteria, respect for EU Council

Decisions and Recommendations in the context of the excessive deficit procedure, and a positive evaluation of progress made with respect to policy criteria in the Memorandum of Economic and Financial Policies (MEFP) and in this Memorandum of Understanding on specific economic policy conditionality (MoU), which specifies the detailed criteria that will be assessed for the successive reviews up to the end of the programme. The review taking place in any given quarter will assess compliance with the conditions to be met by the end of the previous quarter.

If targets are missed or expected to be missed, additional action will be taken. The authorities commit to consult with the European Commission, the ECB and the IMF on the adoption of policies that are not consistent with this Memorandum. They will also provide the European Commission, the ECB and the IMF with all information requested that is available to monitor progress during programme implementation and to track the economic and financial situation. Prior to the release of the instalments, the authorities shall provide a compliance report on the fulfilment of the conditionality.]

1 On 8 April 2011, Eurogroup and ECOFIN Ministers issued a statement clarifying that EU (European Financial Stabilisation Mechanism) and euro-area (European Financial Stability Facility) financial support would be provided on the basis of a policy programme supported by strict conditionality and negotiated with the Portuguese authorities, duly involving the main political parties, by the Commission in liaison with the ECB, and the IMF.

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1. Fiscal policy

Objectives:

Reduce the Government deficit to below EUR 10,068 million (equivalent to 5.9% of GDP based on current projections) in 2011, EUR 7,645 million (4.5% of GDP) in 2012 and EUR 5,224 million (3.0% of GDP) in 2013 by means of high-quality permanent measures and minimising the impact of consolidation on vulnerable groups; bring the government debt-to- GDP ratio on a downward path as of 2013; maintain fiscal consolidation over the medium term up to a balanced budgetary position, notably by containing expenditure growth; support competitiveness by means of a budget-neutral adjustment of the tax structure.

Fiscal policy in 2011

1.1. The Government achieves a general government deficit of no more than EUR 10,068 millions in 2011. [Q4-2011]

1.2. Over the remainder of the year, the government will rigorously implement the Budget Law for 2011 and the additional fiscal consolidation measures introduced before May 2011. Progress will be assessed against the (cumulative) quarterly deficit ceilings in the Memorandum of Economic and Financial Policies (MEFP), including the Technical Memorandum of Understanding (TMU). [Q3 and Q4-2011]

Fiscal policy in 2012

1.3.On the basis of a proposal developed by the time of the first review, the 2012 Budget will include a budget neutral recalibration of the tax system with a view to lower labour costs and boost competitiveness [October 2011].

1.4.The government will achieve a general government deficit of no more than EUR 7,645 millions in 2012. [Q4-2012]

1.5. Throughout the year, the government will rigorously implement the Budget Law for 2012. Progress will be assessed against the (cumulative) quarterly deficit ceilings in the

Memorandum of Economic and Financial Policies (MEFP), including the Technical Memorandum of Understanding (TMU). [Q1, Q2, Q3 and Q4-2012]

1.6. The following measures will be carried out with the 2012 Budget Law [Q4-2011], unless  otherwise specified:

Expenditure

1.7.Improve the working of the central administration by eliminating redundancies, increasing efficiency, reducing and eliminating services that do not represent a cost-effective use of public money. This should yield annual savings worth at least EUR 500 million. Detailed plans will be presented by the Portuguese authorities and will be assessed by Q1-2012; the budgetary impacts will spread to 2014. To this end, the government will:

i. reduce the number of services while maintaining quality of provision;

ii. create a single tax office and promoting services' sharing between different

parts of the general government;

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iii. reorganise local governments and the provision of central administrationservices at local level;

iv. regularly assess the value for money of the various public services that are part

of the government sector as defined for national accounts purposes;

v. promote mobility of staff in central, regional and local administrations;

vi. reduce transfers from the State to public bodies and other entities;

vii. revise compensation schemes and fringe benefits in public bodies and entities

that independently set their own remuneration schemes;

viii. reduce subsidies to private producers of goods and services.

1.8.Reduce costs in the area of education, with the aim of saving EUR 195 million by

rationalising the school network by creating school clusters; lowering staff needs, centralising

procurement; and reducing and rationalising transfers to private schools in association

agreements.

1.9. Ensure that the aggregate public sector wage bill as a share of GDP decreases in 2012 and

2013 [Q2-2012 for assessment; Q2-2013 to complete process].

· Limit staff admissions in public administration to achieve annual decreases in 2012-2014 of 1% per year in the staff of central administration and 2% in local and regional administration. [Q3-2011]

· Freeze wages in the government sector in nominal terms in 2012 and 2013 and constrain promotions.

· Reduce the overall budgetary cost of health benefits schemes for government employees schemes (ADSE, ADM and SAD) lowering the employer’s contribution and adjusting the scope of health benefits, with savings of EUR 100 million in 2012.

1.10. Control costs in health sector on the basis of detailed measures listed below under

'Health-care system', achieving savings worth EUR 550 million;

1.11. Reduce pensions above EUR 1,500 according to the progressive rates applied to the wages of the public sector as of January 2011, with the aim of yielding savings of at least

EUR 445 million;

1.12. Suspend application of pension indexation rules and freeze pensions, except for the lowest pensions, in 2012;

1.13. Reform unemployment insurance on the basis of detailed measures listed below under

'Labour market and education', yielding medium-term savings of around EUR 150 million;

1.14. Reduce transfers to local and regional authorities by at least EUR 175 million with a

view to having this subsector contributing to fiscal consolidation;

1.15. Reduce costs in other public bodies and entities by at least EUR 110 million;

1.16. Reduce costs in State-owned enterprises (SOEs) with the aim of saving at least EUR

515 million by means of:

i. sustaining an average permanent reduction in operating costs by at least 15%;

ii. tightening compensation schemes and fringe benefits;

iii. rationalisation of investment plans for the medium term;

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iv. increase their revenues from market activities.

1.17. Permanently reduce capital expenditure by EUR 500 millions by prioritising investment

projects and making more intensive use of funding opportunities provided by EU structural

funds.

Revenue

1.18. Introduction of a standstill rule to all tax expenditure, blocking the creation of new

items of tax expenditure and the enlargement of existing items. The rule will apply to all

kinds of tax expenditure, of a temporary or permanent nature, at the central, regional or local

level.

1.19. Reduction of corporate tax deductions and special regimes, with a yield of at least EUR

150 million in 2012. Measures include:

i. abolishing all reduced corporate income tax rates;

ii. limiting the deductions of losses in previous years according to taxable matter and

reducing the carry-forward period to 3-year;

iii. reducing tax allowances and revoking subjective tax exemptions;

iv. curbing tax benefits, namely those subject to the sunset clause of the Tax Benefit

Code, and strengthening company car taxation rules;

v. proposing amendments to the regional finance law to limit the reduction of

corporate income tax in autonomous regions to a maximum of 20% vis-à-vis the

rates applicable in the mainland.

1.20. Reduction of personal income tax benefits and deductions, with a yield of at least EUR

150 million in 2012. Measures include:

i. capping the maximum deductible tax allowances according to tax bracket with

lower caps applied to higher incomes and a zero cap for the highest income

brackets;

ii. applying separate caps on individual categories by (a) introducing a cap on health

expenses; (b) eliminating the deductibility of mortgage principal and phasing out

the deductibility of rents and of mortgage interest payments for owner-occupied

housing; eliminate interest income deductibility for new mortgages (c) reducing

the items eligible for tax deductions and revising the taxation of income in kind;

iii. proposing amendments to the regional finance law to limit the reduction of

personal income tax in autonomous regions to a maximum of 20% vis-à-vis the

rates applicable in the mainland.

1.21. Apply personal income taxes to all types of cash social transfers and ensure convergence

of personal income tax deductions applied to pensions and labour income with the aim of

raising at least EUR 150 million in 2012.

1.22. Changes in property taxation to raise revenue by at least EUR 250 million by reducing

substantially the temporary exemptions for owner-occupied dwellings. Transfers from the

central to local governments will be reviewed to ensure that the additional revenues are fully

used for fiscal consolidation.

1.23. Raise VAT revenues to achieve a yield of at least EUR 410 million for a full year by:

i. reducing VAT exemptions;

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ii. moving categories of goods and services from the reduced and intermediate

VAT tax rates to higher ones;

iii. proposing amendments to the regional finance law to limit the reduction of

VAT in the autonomous regions to a maximum of 20% vis-à-vis the rates

applicable in the mainland.

1.24. Increase excise taxes to raise at least EUR 250 million in 2012. In particular by:

i. raising car sales tax and cutting car tax exemptions;

ii. raising taxes on tobacco products;

iii. indexing excise taxes to core inflation;

iv. introducing electricity excise taxes in compliance with EU Directive 2003/96.

1.25. Increase efforts to fight tax evasion, fraud and informality to raise revenue by at least

EUR 175 million in 2012.

Fiscal policy in 2013

1.26. The government achieves a general government deficit of no more than EUR 5,224

million in 2013. ). [Q4-2013]

1.27. Throughout the year, the government will rigorously implement the Budget Law for

2013. Progress will be assessed against the (cumulative) quarterly deficit ceilings in the

Memorandum of Economic and Financial Policies (MEFP), including the Technical

Memorandum of Understanding (TMU). [Q1, Q2, Q3 and Q4-2013]

1.28. The following measures will be carried out with the 2013 Budget Law [Q4-2012],

unless otherwise specified:

Expenditure

1.29. Further deepening of the measures introduced in the 2012 Budget Law with a view of

reducing expenditure in the area of:

i. central administration functioning: EUR 500 million. Detailed plans will be

presented and assessed before Q3-2012;

ii. education and school network rationalization: EUR 175 million;

iii. wage bill: annual decreases of 1% per year in headcounts of central

administration and 2% in local and regional administrations;

iv. health benefits schemes for government employees schemes: EUR 100 million.

v. health sector: EUR 375 million;

vi. transfers to local and regional authorities: EUR 175 million;

vii. reduce further costs in other public bodies and entities, and in SOEs: EUR 175

million;

viii. capital expenditure: EUR 350 million;

ix. maintain the suspension of pension indexation rules except for the lowest

pensions in 2013.

6

1.30. In addition, the government will extend the use of means testing and better target social

support achieving a reduction in social benefits expenditure of at least EUR 350 million.

Revenue

1.31. Further deepening of the measures introduced in 2012 Budget Law, leading to extra

revenue in the following areas:

i. corporate tax bases and reduce tax benefits and tax deductions: EUR 150

million;

ii. personal income tax benefits and tax deductions: EUR 175 million;

iii. taxation of all types of cash social transfers and convergence of personal

income tax deductions for pensions and labour income: EUR 150 million;

iv. excise taxes: EUR 150 million.

1.32. Update the notional property value of real estate for tax purposes to raise revenue by at

least EUR 150 million in 2013. Transfers from the central to local governments will be

reviewed to ensure that the additional revenues are fully used for fiscal consolidation.

Fiscal policy in 2014

1.33. The government will aim at achieving a general government deficit of no more than

EUR 4,521 millions in 2014. The necessary measures will be defined in the 2014 Budget

Law. [Q4-2013]

1.34. Throughout the year, the Government will rigorously implement the Budget Law for

2014. Progress will be assessed against the (cumulative) quarterly deficit ceilings in the

Memorandum of Economic and Financial Policies (MEFP), including the Technical

Memorandum of Understanding (TMU). [Q1, Q2, Q3 and Q4-2013]

1.35. With the 2014 Budget Law, the Government will further deepen the measures

introduced in the 2012 and 2013 with a view in particular to broadening tax bases and

moderating primary expenditure to achieve a declining ratio of government expenditure over

GDP.

2. Financial sector regulation and supervision

Objectives

Preserve financial sector stability; maintain liquidity and support a balanced and orderly

deleveraging in the banking sector; strengthen banking regulation and supervision; bring to

closure the Banco Português de Negócios case and streamline state-owned Caixa Geral de

Depósitos; strengthen the bank resolution framework and reinforce the Deposit Guarantee

Fund; reinforce the corporate and household insolvency frameworks.

Maintaining liquidity in the banking sector

2.1. Subject to approval under EU competition rules, the authorities are committed to

facilitate the issuance of government guaranteed bank bonds for an amount of up to EUR 35

billion, including the existing package of support measures.

7

Deleveraging in the banking sector

2.2. Banco de Portugal (BdP) and the ECB, in consultation with the European Commission

(EC) and the IMF, will include clear periodic target leverage ratios and will ask banks to

devise by end-June 2011 institution-specific medium-term funding plans to achieve a stable

market-based funding position. Quarterly reviews will be conducted in consultation with the

EC and the IMF, and will examine the feasibility of individual banks’ plans and their

implications for leverage ratios, as well as the impact on credit aggregates and the economy as

a whole, and the BdP will then request adjustments in the plans as needed.

Capital buffers

2.3. BdP will direct all banking groups supervised by BdP to reach a core Tier 1 capital ratio

of 9 percent by end-2011 and 10 percent at the latest by end-2012 and maintain it thereafter.

If needed, using its Pillar 2 powers, the BdP will also require some banks, based on their

specific risk profile, to reach these higher capital levels on an accelerated schedule, taking

into account the indications of the solvency assessment framework described below. Banks

will be required to present plans to BdP by end of June 2011 on how they intend to reach the

new capital requirements through market solutions.

2.4. In the event that banks cannot reach the targets on time, ensuring higher capital

standards might temporarily require public provision of equity for the private banks. To that

effect, the authorities will augment the bank solvency support facility, in line with EU state

aid rules, with resources of up to EUR 12 billion provided under the programme, that takes

into account the importance of the new capital requirements and which will be designed in a

way that preserves the control of the management of the banks by their non-state owners

during an initial phase and allow them the option of buying back the government’s stake. The

banks benefitting from equity injections will be subjected to specific management rules and

restrictions, and to a restructuring process in line with EU competition and state aid

requirements, that will provide the incentive to give priority to market-based solutions.

Caixa Geral de Depósitos (CGD)

2.5. The state-owned CGD group will be streamlined to increase the capital base of its core

banking arm as needed. The CGD bank is expected to raise its capital to the new required

level from internal group resources, and improve the group's governance. This will include a

more ambitious schedule toward the already announced sale of the insurance arm of the

group, a program for the gradual disposal of all non-core subsidiaries, and, if needed a

reduction of activities abroad.

Monitoring of bank solvency and liquidity

2.6. The BdP is stepping up its solvency and deleveraging assessment framework for the

system as a whole and for each of the eight largest banks, and will seek an evaluation of the

enhanced assessment framework by end-September 2011 by a joint team of experts from the

EC, the ECB and the IMF.

2.7. By end-June 2011, the BdP will also design a program of special on-site inspections to

validate the data on assets that banks provide as inputs to the solvency assessment, This

program will be part of a capacity building technical cooperation project put in place with the

support of the EC, the ECB, and the IMF that will bring together Portuguese supervisors,

cooperating central banks and/or supervisory agencies, external auditors and other experts as

needed.

8

2.8. The BdP will provide quarterly updates of banks’ potential capital needs going forward

and check that their deleveraging process remains on track and properly balanced. Whenever

the assessment framework will indicate that a bank’s core Tier 1 ratio might fall under 6

percent under a stress scenario over the course of the program, the BdP, using its Pillar 2

powers, will ask it to take measures to strengthen its capital base.

Banking regulation and supervision

2.9. BdP will ensure by the end of September 2011 that the disclosure of non-performing

loans will be improved by adding a new ratio aligned with international practices to the

current ratio that covers only overdue loan payments. BdP will intensify on-site inspections

and verification of data accuracy with technical assistance from the IMF, in the context of the

data verification exercise for the new solvency assessment framework. BdP will allocate new

resources to the recruitment of additional specialist banking supervisors. Close coordination

will be maintained between home and host country supervisors within the EU framework for

cross-border banking supervision.

Banco Português de Negócios

2.10. The authorities are launching a process to sell Banco Português de Negócios (BPN) on

an accelerated schedule and without a minimum price. To this end, a new plan is submitted to

the EC for approval under competition rules. The target is to find a buyer by the end of July

2011 at the latest.

2.11. To facilitate the sale, the 3 existing special purpose vehicles holding its non-performing

and non-core assets have been separated from BPN, and more assets could be transferred into

these vehicles as part of the negotiations with prospective buyers. BPN is also launching

another program of more ambitious cost cutting measures with a view to increase its

attractiveness to investors

2.12. Once a solution has been found, CGD’s state guaranteed claims on BPN and all related

special purpose vehicles will be taken over by the state according to a timetable to be defined

at that time.

Bank resolution framework

2.13. The authorities will amend legislation concerning credit institutions in consultation with

the EC, the ECB and the IMF by end-November 2011 to, inter alia, impose early reporting

obligations based on clear triggers and penalties. BdP will be authorised to take remedial

measures to promote implementation of a recovery plan. Credit institutions with systemic

risks will be required to prepare contingency resolution plans) subject to regular review.

2.14. The amendments will introduce a regime for the resolution of distressed credit

institutions as a going concern under official control to promote financial stability and protect

depositors. The regime will set out clear triggers for its initiation, and restructuring tools for

the resolution authorities shall include recapitalization without shareholder pre-emptive rights,

transfer of assets and liabilities to other credit institutions and a bridge bank.

The Deposit Guarantee Fund

2.15. The authorities will strengthen the legislation on the Deposit Guarantee Fund (FGD)

and on the Guarantee Fund for Mutual Agricultural Credit Institutions (FGCAM), in

consultation with EC, the ECB and the IMF, by end-2011. These funds' functions will be re9

examined to strengthen protection of guaranteed depositors. These funds should however

retain the ability to fund the resolution of distressed credit institutions and in particular the

transfer of guaranteed deposits to another credit institution but not to recapitalise them. Such

financial assistance shall be capped at the amount of guaranteed deposits that would have to

be paid out in liquidation. This should be permissible only if it does not prejudice their ability

to perform their primary function.

2.16. The Insolvency Law will be amended by the end of November 2011 to provide that

guaranteed depositors and/or the funds (either directly or through subrogation) will be granted

a higher priority ranking over unsecured creditors in the insolvent state of a credit institution.

Corporate and household debt restructuring framework

2.17. To better facilitate effective rescue of viable firms, the Insolvency Law will be amended

by end November 2011 with technical assistance from the IMF, to, inter alia, introduce fast

track court approval procedures for restructuring plans.

2.18. General principles on voluntary out of court restructuring in line with international best

practices will be issued by end-September 2011.

2.19. The authorities will also take the necessary actions to authorise the tax and social

security administrations to use a wider range of restructuring tools based on clearly defined

criteria in cases where other creditors also agree to restructure their claims, and review the tax

law with a view to removing impediments to voluntary debt restructuring.

2.20. The personal insolvency procedures will be amended to better support rehabilitation of

financially responsible individuals, which will balance the interests of creditors and debtors.

2.21. The authorities will launch a campaign to raise public and stakeholder awareness of the

restructuring tools available for early rescue of viable firms through, e.g., training and new

information means.

Monitoring of corporate and household indebtedness

2.22. The authorities will prepare quarterly reports on corporate and household sectors

including an assessment of their funding pressures and debt refinancing activities. The

authorities will assess guarantee programmes currently in place and evaluate market-based

financing alternatives. A task force will be constituted to prepare contingency plans to

efficiently deal with the challenges posed by high corporate and household sectors

indebtedness. These enhanced monitoring actions will put be in place by end-September

2011 in consultation with the EC, the IMF and the ECB.

3. Fiscal-structural measures

Objectives

Improve the efficiency of the public administration by eliminating redundancies, simplifying

procedures and reorganising services; regulate the creation and functioning of all public

entities (e.g. enterprises, foundations, associations); streamline the budgetary process through

the newly approved legal framework, including by adapting accordingly the local and

regional financial legal frameworks; strengthen risk management, accountability, reporting

and monitoring.

 

Date Inserted: 19 July 2011
 
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