Portugal sees economy shrinking 2.3pc in 2011, 1.7pc in 2012

LISBON: Bailed-out Portugal will see its economy shrink 2.3 percent this year and 1.7 percent in 2012 as it bites the bullet on tough austerity measures, Finance Minister Vitor Gaspar said Thursday.

Gaspar said "the economic recovery will only occur in 2013" as the government slashes spending and hikes taxes to stabilise the public finances after the International Monetary Fund and the European Union stumped up 78 billion euros ($110 billion) for Lisbon earlier this year.

The EU-IMF debt rescue package is based on forecasts for a contraction of 2.2 percent in 2011 and 1.8 percent in 2012 while earlier this week, the central bank said the economy would shrink by 2.0 percent and 1.8 percent.

The government, elected in early June to replace the Socialists, aims to cut the public deficit from 9.1 percent of Gross Domestic Product in 2010 to 5.9 percent this year and then to 3.0 percent -- the EU ceiling -- by 2013.

Gaspar told a press conference that the government will step up its privatisation programme and tax increases this year, bringing in some 1.03 billion euros.

The crisis facing Portugal "is without precedent in the recent history of the country", Gaspar said.

"The economic and financial risks confronting the country are of a considerable scale, which means we must meet, even exceed the targets set," he added. "As failure is not an option, we must bet on caution."

The government expects domestic demand to shrink 5.8 percent this year and 4.1 percent in 2012.

Exports, a crucial growth driver, should increase 6.7 percent and 5.6 percent, while imports are estimated to fall 4.8 percent and 1.3 percent.

Unemployment will hit 12.5 percent this year and 13.2 percent in 2012.

Portugal, along with Greece and Ireland, had to be bailed out in May as the financial markets turned against it, meaning it could no longer raise money to pay off its debts at sustainable rates of interest.

Lisbon's plight has raised fears over fellow eurozone states Spain and Italy as efforts to put together another bailout for Greece are plagued by sharp differences over whether private investors should carry some of the burden.

EU leaders have held a series of meetings without finding a way out of the impasse and are expected to gather again next week as the debt crisis roils the markets and makes a solution ever more important but difficult to achieve.

On Tuesday, the central bank downgraded its 2011 forecast to a 2.0 percent contraction from its previous estimate of 1.4 percent to take into account the severity of the austerity measures being taken.

The bank said that next year the economy would shrink 1.8 percent instead of growing by 0.3 percent as it had signalled previously.

Last week, Moody's Investors Service slashed its credit rating on Portugal by four notches to Ba2 from Baa1 because of "the growing risk that Portugal will require a second" debt rescue.

Moody's, which along with the other ratings agencies have downgraded Portugal, said its decision also reflected increased concerns that Lisbon would not meet the EU-IMF deficit reduction and debt stabilisation targets.

On Thursday, the Portuguese stock market slumped more than 2.0 percent as investors fretted over the outlook and the growing risk of debt contagion rippling through the eurozone.

Copyright AFP (Agence France-Presse), 2011

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