Portugal wants cheap EU loans to boost post-bailout reforms

By Daniel Alvarenga

LISBON (Reuters) - Support from a Europe-wide cheap loans scheme that is still on the drawing board offers Portugal a fighting chance of exiting its international bailout successfully, the country's deputy minister for Europe said on Monday.

Portugal needs to press ahead quickly with another round of painful economic reforms after its international bailout ends in mid-2014, Bruno Macaes told Reuters in an interview.

Proposals for the system of cheap funds as an incentive for such reforms will be on the agenda of Thursday's European Summit in Brussels, and Macaes said leaders needed to introduce the scheme soon.

"(Portugal's) structural reforms must be quicker, more incisive, not taking so long as they have so that their effects are felt more quickly," Macaes said.

"This can only be possible with support from these contractual arrangements: institutional and financial support".

Under these arrangements, legally binding contracts with economic reform targets and milestones, member states would be assigned funds via grants or cheap loans.

Portugal, which navigated its way out of a deep recession in the second quarter, is fighting to get a grip on public finances as it seeks to become the second euro zone state after Ireland to return to financing itself.

With a further wave of spending cuts due in 2014, including slashing public pensions and salaries, already debt-laden Lisbon believes the cheap loans scheme would be the perfect way to make sure its reforms are sustainable.

"Can this help the exit from the bailout? Without a doubt," Macaes said. "...Exiting a program implies completing structural reforms and returning to economic growth."

Macaes said reforming the state remained a priority.

"Our labor market is now flexible, but there are several other structural reforms still needed in the public sector and in education, and we can use this instrument."

ATTRACTIVE RATES

The funds, tempting because they would be offered at interest rates below those in financial markets, can ease the initial pain of structural reforms, Macaes said.

"The mechanism solves the temporal incoherence of reforms good in the long term but bad in the short, making them good in both the short and long terms."

The wide-ranging austerity program demanded by the European Union and International Monetary Fund as a condition of Portugal's 2011 bailout triggered the country's worst recession since the 1970s, with unemployment hitting a record 17.7 percent earlier this year.

But as the economy crawls its way back with two consecutive quarters of growth, the state secretary for Europe said these agreements could free up precious resources in the future.

"It's important funds go to reduce or eliminate the social costs of reforms, which often make them impossible to execute."

Under the mechanism, which may be ready in the last quarter of 2014, member states would design and approve measures themselves and then negotiate funding with the European Commission.

This differs from the top-down methodology used in distributing current EU structural funds, which have more rigid criteria defined in advance by European institutions.

"Each deal would be completely flexible in its scheduled, financial size, and wholly voluntary. It would not be an imposition from the outside," Macaes said, drawing a line between these agreements and the strictness of a bailout.

(Editing by Axel Bugge, John Stonestreet)