Portugal to exit international bailout on Saturday

http://www.theguardian.com/world/2014/may/16/portugal-exit-international-bailout-saturday-eu-imf

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On Saturday Portugal willbecome the second eurozone state to exit its international financial bailout, after Ireland, having stuck to the European Union's austerity demands to beat the eurozone crisis.

The €78bn (£64.5bn) rescue programme assembled by the EU and the International Monetary Fund in 2011 for the nearly bankrupt country will formally conclude with Portugal's budget in much better shape and its borrowing costs at eight-year lows.

The bailout exit comes in the same week in which new data showed a shock 0.7% drop in Portugal's GDP in the first quarter of the year. The quarterly figures point to the risks inherent in an economic recovery plan which, by focusing on export growth by cutting labour costs, has become dependent on volatile foreign demand.

The Portuguese government has made it cheaper for firms to hire and fire workers. That has lowered the cost of doing business and helped bring unemployment down to 15.1% from its 2013 peak of 17.5%. Labour costs in Portugal fell by 8% to €11.6 an hour between 2011 and 2013, according to the EU statistics agency Eurostat. That reduction has delivered competitiveness gains. But the European commission has said Portugal is still only halfway to getting pay down to levels that could tangibly reduce unemployment further.

Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, said: " It is still a job half done. The danger is that the reforms grind to a screeching halt. There is a very high risk that that happens."

The exit means that lenders from the European commission, European Central Bank and IMF have stopped reviewing the Portuguese economy. The country can now change policies more freely, even though it still needs to gradually reduce the budget deficit under EU rules.

The Portuguese government has already said it will partly reverse salary cuts in the public sector in the next few years and it is considering cutting taxes next year.