Portugal ‘to sink into recession’

Portugal will sink into recession this year and next due to the terms of its 78bn euro ($116bn; £70bn) rescue deal, its finance minister has said.

Fernando Teixeira dos Santos said austerity measures required as a condition of the funds would see the economy shrink by 2% in 2011 and 2012.

Tax rises and spending cuts will form part of a major economic restructuring.

The head of the European mission said the terms of the bail-out were “tough” but “necessary and fair”.

Under the deal there will be an additional programme of privatisations, and pensions exceeding 1,500 euros will be cut. The sales tax on some products will rise.

The aim is to cut Portugal’s deficit of 9.1% – three times the eurozone’s limit – to 3% by 2013.

Juergen Kroeger, who led the EC mission, told reporters at a press conference in Lisbon that 52bn euros of loans would come from the EU and rest from the IMF.

But as part of the deal Portugal had to tackle imbalances in the economy, and restructuring the banking sector was necessary, he said.

He accepted that the changes being demanded were “front-loaded” and would be “painful”, but they were needed to address urgent issues.

“These are major structural reforms that are aimed at fostering competitiveness,” he said.

Mr dos Santos accepted that the restructuring would be tough for the Portuguese people, but added: “This is a programme aimed at returning to growth and employment.”

Other measures to be taken would be changes to labour market laws and social benefits.