Lisbon (Reuters) - terms and Conditions attached to a rescue of 78 billion euro of the Portugal indebted economy are likely to propel it into a deep recession two years ago, an official source said Wednesday.
Caretaker Prime Minister Jose Socrates has announced late Tuesday that the country had reached an agreement for three years with the European Union and the Monetary Fund rescue International after weeks of negotiations with the third country of the eurozone to ask for foreign aidAfter the Greece and the Ireland.
Officials of the European Union and the IMF have been the main opposition of the Portugal meet on Wednesday to obtain its agreement to the terms of the rescue plan, with the elections in a month.
Socrates says that the agreement represents a victory for Lisbon, because it avoided very strict measures including the Greece and the Ireland been saddled with when they were rescued last year.
But an official source said Reuters austerity measures to be included in the deal, such as an increase in taxes, point to a "contraction of 2% to the gross domestic product in 2011 and 2012."
That will make it even more difficult for the heavily indebted countries, which took some of the lowest growth rates in Europe for a decade, to overcome the crisis and return to financial health.
The source told Reuters will increase taxes on cars and property and there will be reductions in deductions on health, education and housing.
Jonathan Loynes, Chief European Economist at Capital Economics, also forecast a contraction of two percent this year.
"In this context, then the confirmation of rescue should reassure some that Portugal can meet its upcoming bond redemptions, it does put an end to speculation that - with the Greece and perhaps other - he must sooner or later to take a form any debt restructuring" he said.
The announcement of the agreement have provided relief in the bond market, where the Portuguese yields fell for the first time in several weeks.
Yields on bonds of 10 Portuguese, which hit a lifetime record euro 10.32% Tuesday, fell to about 10 per cent and the spread of German bunds fell to 677 707 Tuesday senior basis points.
Portugal was forced to seek a rescue plan after his Government collapsed last month, sending its soaring borrowing costs.
In a reminder of the challenges faces Portugal in the sale of the debt, it will hold an auction of Treasury bills Wednesday to issue up to 3 months bills EUR 1 billion.
12,284 DEFICIT OBJECTIVES
Lisbon has won some latitude for his drive to austerity of its lenders. The objective of this year's budget deficit was brought to 5.9% of the domestic product raw 4.6% previously.
That still represents a sharp cut, given the deficit amounted to 9.1 percent of GDP last year, and the agreement, it must be lowered to 4.5 per cent of GDP in 2012 and 3 per cent in 2013.
The rescue agreement includes up to€ 12 billion for the banking sector recapitalization and ordered banks to increase their ratios of core Tier 1 capital gradually to 10 per cent by the end of 2012, said the official source.
It is also considering 5.3 billion euros of revenues from privatization until 2013.
The package must broad cross-party support because the fall of the Government of Socrates last month means that the winner of the election General snap on June 5 it will implement.
Leader of the opposition Social Democrat Pedro Passos Coelho was to meet officials from the EU and the IMF later.
The rate of interest on the loan bailout of the Portugal should be defined at a meeting of Ministers of Finance of the eurozone in mid-May.
"Even if we have clarity regarding the amount, the more interesting detail will be the rate of interest that Portugal will have to pay on loans, so that we are still waiting to do this," said WestLB Michael Leister rates strategist.
Portuguese loan agreement is necessary before June 15, when Lisbon was to redeem 4.9 billion euros of bonds.
Representatives of the European Commission, the European Central Bank and International Monetary Fund were in Lisbon for about a month to forge the agreement.
(Reported by Sergio Goncalves; writing by Axel Bugge, editing by Mike Peacock)
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