The European Commission estimates that new measures amounting to €450 million will have to be put in place if Portugal is to meet its 2016 fiscal targets.
The government needs to submit a ‘list of things to do’ by October 15th with "effective measures” to be implemented by the end of the year.
The two big unknowns are in the banking sector with the sale of Novo Banco set to create a massive hole in the national accounts, alongside the €4.6 billion recapitalisation of Caixa Geral de Depósitos.
The impact of these two ‘resolutions’ on the public accounts are of deep concern to the European Commission, which calls for new measures to raise taxes and/or cut spending.
The figures to May this year are on schedule, but almost certainly will be wiped out by the government’s solution to the banking sector’s twin problems.
The Government has said that the recapitalisation of Caixa Geral will not hit this year’s accounts, but Brussels is not so sure as the resolution involved borrowing money which, although not classified as ‘State aid’ has to be accounted for somewhere.
The report on the fourth post-bailout monitoring mission held in late June is clear that these two banks will cost money, even though one plan is for the pain to be spread over many years.
If the Novo Banco sale goes through at an expected multi-billion euro loss, at least the Commission will know where Portugal stands as the uncertainty is in many ways worse that the expected financial hit.
The Government reacted to these warnings with its usual bland assurances, saying it will continue to take steps to improve the health of the banking sector and promises to end 2016 with a budget deficit "compatible with European rules" i.e. below 3% of GDP.
A press release issued today by the Ministry of Finance attempts to put a positive spin on the road-crash that is Caixa Geral and adds that the ministry is busying itself recapitalising companies, modernising public administration and really getting to grips with the National Reform Programme "to promote competitiveness and sustainable and inclusive growth."
Brussels points out that the lowering of VAT for Portugal's restaurant sector and the reversal of public sector wage cuts have led to the government adopting a policy of late payments in the public sector, particularly in health, which has stored up a bill of €600 million.
There are other risks too, such as the partial reversal of the privatisation of TAP which has added €30 million to the national debt on a point of principle.
The European Commission also warns that the viability of Portugal's pension system "is not yet assured" as it depends of huge chunks of money being transferred from other areas each month to keep it going.
One of the problems that the government can not talk its way out of, is the debt to GDP ratio that at the end of 2015 was 129% and has risen since as the State keeps borrowing money while trying to sort out Portugal’s underlying economic problems.
In summary, "The need for structural fiscal reforms remains substantial and urgent."
