Health and education spending to be cut by €745m, state pensions reduced and major building projects axed
Portugal woke up to the price of its €78bn (£70bn) bailout on Wednesday as new airports and high-speed rail lines were sacrificed in a package of austerity measures and the government pledged to freeze pensions and shrink the civil service.
Lisbon's new international airport, already on hold, and the building of a high-speed rail link between Lisbon and Oporto will now be put back until after 2013, according to state news agency Lusa. Health and education spending will be cut by €745m, civil service pay and pensions will be frozen, and people on state pensions above €1,500 a month will have them reduced.
Civil service staffing is to be squeezed by 1% a year in central government, while regional administrations and town halls will be told to shed 2% of their employees annually.
Portugal's banks will take up to €12bn of the bailout funds to rebuild their capital ratios, according to reports. The banks would have to raise their core tier one capital ratio – a gauge of higher quality capital that mainly comprises equity and retained earnings – to 9% at the end of this year and to 10% by the end of 2012, Reuters said.
The country will also carry out a fire sale of the nationalised Banco Português de Negócios (BPN) bank. "The authorities are launching a process to sell BPN on an accelerated schedule and without a minimum price," according to a memorandum of understanding seen by the Guardian, which added that the sale should be finished in July.
Portugal is expected to reduce public spending by 3.4% of its GDP this year and raise an extra 1.7% of GDP by raising taxes on cars, tobacco and electricity and getting rid of income and corporation tax loopholes.
A detailed investigation of public-private partnerships (PPPs), which have been used for building hospitals, roads and rail lines, will be carried out to see if they are hiding extra government debt. New PPP projects will be suspended.
José Sócrates, Portugal's caretaker prime minister, announced the areas that would remain untouched when he explained the bailout during a television address to the nation on Tuesday night.
These included pensions for the worse-off and the retirement age. But he failed to reveal what austerity measures came with the bailout package, beyond saying they would be similar to those rejected by parliament in March.
The March defeat brought down his minority socialist government and a snap election was called for 5 June. Polls show the opposition Social Democrat Party (PSD), which rejected the March austerity package, may win that vote.
Representatives of the International Monetary Fund, the European Union and the European Central Bank met Social Democrat leaders on Wednesday morning to seek their backing for the plan.
"The PSD will give its opinion on what it has read and heard late today or early tomorrow," said Carlos Moedas, the party's economics advisor, after the meeting.
Social Democrat leaders had already indicated they might change elements of any bailout-related austerity package if they were elected to government, although always with the aim of hitting this year's target of reducing the budget deficit to 5.9% of GDP.
The IMF said: "We have said from the start that it is important that any agreement have multi-party support and we shall continue in our efforts with opposition parties to show that this is the case."
Portugal managed to raise €1.12bn euros in three-month treasury bills today with demand almost doubling the offer, but investors insisted on a 4.65% interest rate – up from 4.05% two weeks ago.
Jonathan Loynes, chief European economist at Capital Economics in London, said the bailout might not be enough to stave off restructuring: "It won't put an end to speculation that – along with Greece and perhaps others – it will sooner or later need to undertake some form of debt restructuring."