IMF: Bailed-out Portugal needs extra debt effort

LISBON, Portugal -- Portugal's financial recovery program is entering a risky phase as it struggles to cut its heavy debt load amid a continuing recession, growing unemployment and mounting opposition to austerity measures, the International Monetary Fund said Thursday.

The government's debt-reducing measures have helped allay market concerns about lending money to the ailing country, while it has made good on promises of reforms in return for last year's (EURO)78 billion ($100 billion) bailout, the IMF said in a report on Portugal's progress.

But "risks to the attainment of the program's objectives have increased markedly," the IMF said, adding that Portugal will need to take further steps to remain on track.

The IMF, the European Central Bank and the European Commission granted Portugal a lifeline to avert looming bankruptcy as the country was engulfed by the eurozone's financial crisis. A decade of average annual growth below 1 percent and mounting debt spooked investors who worried they might not get their money back if they loaned to Portugal.

Though Portugal is one of the eurozone's smaller members in economic terms, the success of its three-year bailout program is seen as crucial for containing Europe's debt woes. Fellow eurozone countries are growing tired of offering new bailouts as many struggle with high debts of their own.

The center-right government has made important strides to restore Portugal's fiscal health, the IMF said, but its economy remains frail and at the mercy of international economic developments amid a broad slowdown in growth.

"An improvement in the broader euro area economic environment will be critical to the program's success," the report said.

The government and the IMF predict an economic contraction of 1 percent in 2013 for a third straight year of recession. The jobless rate, currently at a record 15.9 percent, is seen climbing to 16.4 percent.

An ensuing drop in tax revenue has compelled the coalition government to step up austerity measures to shore up its finances, including what the finance minister calls an "enormous" increase in income taxes next year that will cost many workers the equivalent of a month's pay.

That has brought a broad outcry from opposition political parties and from trade unions, who have called a general strike next month. Recent demonstrations have drawn tens of thousands of people, though Portugal has not so far witnessed the street violence seen in Greece.

Portugal's economic reforms will take time to pay off and additional measures will be needed, the IMF said. With public debt set to peak at 124 percent of gross domestic product in 2014, Portugal's "room for maneuver has diminished."

Aware of the difficulties, the bailout lenders recently eased Portugal's deficit targets, to 5 percent this year and 4.5 percent next.

"While the program's core objectives remain within reach, the buffers in the program to cope with further adverse shocks have narrowed," the report said. "The program also remains short of policies that offer any upsides to near-term employment and competitiveness prospects."