Portugal passes latest bailout test

(AP) LISBON, Portugal - Portugal's foreign bailout creditors will provide another batch of the country's 78 billion euro ($96 billion) rescue package after concluding the government is abiding by the terms of the loan, the finance minister and international lenders said Monday.

However, the impact of austerity measures demanded by the bailout agreement and Portugal's continuing economic frailty have forced the government to provide gloomier forecasts for debt and growth.

Public debt will rise to 118 percent of gross domestic product in 2013, Finance Minister Vitor Gaspar predicted. That is up from the 115 percent the government had previously forecast. Gaspar said the upward revision is due to lower expectations for GDP growth next year, which is now expected to be only 0.2 percent instead of 0.6 percent.

Portugal is already enduring its third recession in four years, with the government expecting a 3.1 percent contraction in 2012. Unemployment, meanwhile, has increased to a record 15.2 percent, and the government expects it to reach 16 percent next year.

Gaspar said high unemployment will also drain on welfare resources, while lower domestic consumption reduces tax revenue.

Portugal needed a financial lifeline a year ago after a decade of weak growth and rising debt spooked investors, who began charging it unaffordable rates for credit. It followed other eurozone countries Greece and Ireland in needing a bailout.

The country has stuck with its agreed program of austerity measures, featuring pay cuts and tax hikes, and broad economic reforms despite the recession and trade union opposition to a loss of labor rights, including a new law which makes it easier and cheaper to hire and fire workers.

"We have complied with all the quantitative criteria and structural goals," Gaspar told reporters.

He said the budget deficit is on track to fall this year to 4.5 percent, as planned, from 5.6 percent last year. The government is aiming for a deficit of 3 percent next year. It was 9.8 percent in 2010.

Gaspar said Portugal will receive 4.1 billion euro after passing its fourth quarterly test by foreign inspectors. The country has so far received about 75 percent of the promised bailout funds. It has to pass regular inspectors' tests to get the money.

The bailout creditors - the European Central Bank, European Commission and International Monetary Fund - said Portugal "is making good progress" on implementing the bailout program.

However, they noted in a statement that "the need to combine fiscal consolidation with deleveraging private balance sheets while restoring external cost competitiveness remains a difficult balancing act."

Though the bailout agreement covers three years, Portugal will have to tap markets to meet a 9.7 billion euro bond redemption in September 2013.

Some analysts predict Portugal will need more time and money to help it through the eurozone's ongoing sovereign debt crisis and a possible global economic downturn. The government insists it won't need any more aid.

Gaspar said the government intends to raise revenue by privatizing flag carrier TAP Air Portugal and airport management company ANA this year, though the sale of rail freight company CP Carga has been postponed to 2013. Portugal raised 3.3 billion euro last year with the sale of controlling stakes in energy company Energias de Portugal and grid operator REN, both blue-chip companies.

Also Monday, three of Portugal's four largest banks - Banco Comercial Portugues, Banco Portugues do Investimento, and state-owned Caixa Geral de Depositos - said they will together need more than 6 billion euro to meet new European capital requirements. Much of that amount could come from a 12 billion euro government recapitalization fund, though the banks said they will also seek to issue self-financing bonds.

European banks are required by law to shore up their capital cushions by the end of June. They need to increase their core tier 1 capital ratio - the amount of high-quality capital as a percentage of the riskier assets held - to 9 percent. The measure aims to strengthen lenders against financial market uncertainty amid the continent's debt crisis.