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CNBC Transcript: Interview with Mário Centeno, Portugal's Finance Minister at the Ambrosetti Forum.


Following are excerpts from a CNBC interview at the Ambrosetti Forum in Italy, with Julia Chatterley and Mário Centeno, Portugal's Finance Minister.

JC: So we have spoken in the past about how you're redirecting policy more towards consumers and trying to support them, but you know the message I get from the business community is they are concerned about growth, they are concerned about investment, they are concerned about your focus on reform -- respond to their concern.

MC: Thank you very much for having me. It's only partially true the idea that we are focusing more on consumption, we have a substantial focus on recovering income, especially for families; we are also, of course, directing our policy towards firms, towards investment. We have a very ambitious program that is meant to help firms capitalise; we are doing lots of effort in terms of stabilising our financial sector which is crucial for investment and for the economy to grow; we are also promoting very ambitious program of reforms on qualifications, on skills, so that we can retain our best skills at home and of course allow firms to invest. This is very crucial to the overall picture and so I think it is a more mixed policy that we are implementing that, of course, puts growth and exports at a higher level. Actually one of the most interesting figures in the second quarter growth, which was still low, but it is very important to notice that exports increased 1.3 percent quarter on quarter, which is a very strong figure for the situation we face in the overall trade development.

JC: So why do you think people are so concerned about your commitment to reform? Do you think it was because, initially when you came to power, you repealed a number of the former government's measures and so there is this perception now that perhaps, you know, this is a government that is not going in the direction that Europe wants it too?

MC: It was the perception but it really was a mis-perception, because the focus again was on recovering income and lowering taxes that were actually meant to be lower, faded away, because of their temporary nature. We are putting more of an emphasis on reforms that go to the potential growth of Portugal, like the skills that I mentioned before, the reform of public administration -- we have a very ambitious plan on the simplification of public administration, actually we launched already dozens of measures that are, most of them, minor in the sense of the way we can spell them out, but they really go towards the bottle necks in terms of bureaucracy.

JC: One thing that would have an immediate impact would be a corporate tax cut and this was something the former government promised and it seems to have been dropped?

MC: We are focusing and we are going to put that in this Budget, of specific incentives to investment in terms of lowering corporate tax.

JC: So you are going to lower corporate tax?

MC: With incentives to investment.

JC: So if you invest you can earn a lower tax rate?

MC: Exactly.

JC: You also mentioned what is going on with the banks. You've found a very important solution, a private sector solution, for CGD, which involves them raising a billion euros in the market. Are you fearful they may not be able to do that?

MC: Well that is a major achievement, the agreement with the European Commission, considering that the no state aid process… we put a very ambitious business plan, a very professional team was appointed to the management of CGD. We also changed the incentives so it was these three pillars: the business plan, the governance and the incentives. And I think the market will perceive this very easily as a very ambitious ‎and market-orientated operation so we are confident on raising the 500 million on subordinated debt that we have to raise from the market and the effort from the government side is meant to be an investment. We are investing in the bank -- a major Portuguese bank -- it is very important to stabilise the financial system and I think now all pieces are finally sticking together with CGD and of course the solutions that are in the pipeline to the private banks in Portugal.

JC: I think investors remember what happened with Novo Banco though and I think they look at this situation and perhaps go: 'I am not sure we want to touch this,' because there is a trust issue. How do you overcome that?

MC: The only thing that we can do to change the perception again from the developments you mention is focusing on market operations, on talking the market and saying we are committed to stabilising the system, to put it together, to make the financial system to work and of course protect investors.

JC: And some kind of guarantee they won't be bailed in if they invest in this?

MC: Exactly.

JC: And you are saying this at this moment?

MC: Definitely.

JC: So the other concern out there is that the money you are investing here will lead to a higher deficit and that's going to be a problem for your investment grade rating. What are Eurostat saying to you, do you think they are going to be kind to you on this issue?

MC: We are preparing the operation to be considered first of all no state aid, and then after that to be considered as an investment and a capital injection instead of an expenditure that will count for the deficit. Of course there is still a lot of work to do with the European Commission and Eurostat on that front, but I think the basic steps for that decision to be taken are stabilised so we are confident on that.

JC: So the other concern is obviously have only one ratings agency now that gives you an investment grade rating, and that gives you access to QE. But even they are concerned about growth, so what kind of conversations are you having with them? Can you make them more comfortable and confident that you are focused on supporting growth?

MC: That is the message, we are in close connection with them, through the regular mechanisms, we are meeting them frequently. It is very important… that is the message -- we are working with European institutions in a constructive way, we are setting out a set of reforms that really go towards the bottle necks our economy, the financial system, the skills that I mentioned before. The modernisation and a very sustainable reduction on public expenditure -- these are the measures, the reforms that we need to implement to promote growth, in our opinion. We are not actually reverting any structural reforms that were taken during the adjustment program, not in the labour market, not in the judicial system, not in social security system… We are really sticking to them and allowing them to have an effect on our economy. Employment is growing very strongly, social security records ‎show an increase of close to 3 percent year on year on employment, this is a very strong figure. Unemployment is reducing steadily; we have very good indicators for specific groups in the labour market. People with age between 35-44 years old, the unemployment rate actually fell to 7.9 percent, which is less than half of the peak of the crisis; compared to the previous year it is a reduction of more 20 percent… This is a very important signal to the recovery of the economy and I think we are confident that stronger growth will show in the following quarters.

JC: I just want to wrap up. There have been concerns, even with all the measures you talk about, that Portugal is going to find itself on a path ultimately where it has to request a second bailout, it is related to the Investment grade rating, to still a relatively high deficit, high debt levels. Will you do whatever it takes to prevent Portugal having a second bailout?

MC: That's my main job, what we are putting together -- a commitment on the fiscal front and a reduction in public expenditure in precisely that way.

JC: So if the Commission say it's not working, adjust, you will adjust?

MC: We do that from the beginning, we did that from the beginning, the 2016 budget was already a very strong statement in this respect. So we are…

JC: Committed?

MC: Committed.