Business News : Risk-exposed Portugal sticks to tough bailout goals

LISBON (Business News) - Portugal's budget targets for 2012 are ambitious but it has the capacity to hit them, its international lenders said on Monday, saying the recession-mired country's bailout program was on track despite being undermined by rising unemployment.

Finance Minister Vitor Gaspar said he would stick to the program after getting a thumbs-up in the latest inspection review by the European Union and IMF, and that the lenders would recommend payment of the next 4.1 billion euro tranche from the rescue fund.

"There are considerable internal and external risks," Gaspar said. "The only certainty we have is that we need to focus on meeting the targets of the program."

Gaspar said that Portugal had met all targets under the fourth quarterly review of the 78 billion euro bailout and that achieving this year's 4.5 percent of GDP budget deficit target was "viable" despite the risks to the recession-hit economy.

The lenders said that, despite a weaker labor markets, the "ambitious" target remained within reach. Still, the country raised its debt-to-GDP estimate for next year by 3 percentage p oints to 118 percent from what was agreed earlier with the creditors.

In terms of bond spreads, Portugal remains the second-most risky country in the euro zone after Greece, and economists have warned that Lisbon could be hit hard by contagion if Athens leaves the euro. Neighboring Spain's growing crisis is also a big worry.

"In spite of some pressure on some elements of the budget, the government is likely to meet the budget goals," said Paula Carvalho, an economist at Banco BPI.

NOT GREECE

Portugal has introduced sweeping austerity measures, including across-the-board tax hikes and wage cuts for civil servants, and carried out reforms of its labor market and legal system.

It was the third euro zone country to seek a bailout after Greece and Ireland, and it has won consistently strong marks f rom lenders for its efforts to cut its budget deficit and reform the economy.

Euro zone officials have also been keen to draw a distinction between Portugal from Greece's troubles, not least if Athens leaves the euro.

Gaspar said the bailout program "corresponds to the country's economic adjustment needs" and promised to press ahead with structural reforms and privatizations.

Portugal will have received 75 percent of the funds under the program once the next tranche is paid, and many economists say the country may have to seek more emergency funding. But Lisbon has repeatedly said it needs no more time or money.

One particular area of uncertainty has been the sharp rise in unemployment to record levels, which could threaten budget goals because it means the state has to pay more unemployment benefits.

Eurostat said last week that unemployment hit 15.2 percent in April. The government raised its outlook for unemployment to 15.5 percent this year and 16 percent in 2013 on Friday.

Three leading Portuguese banks said on Monday they would draw on funding from the bailout to meet tough capital requirements. Gaspar said banks' liquidity has improved significantly and they were well-capitalized.

Under the bailout, 12 billion euros was set aside for the bank recapitalizations.