– Adds Comments On Impact For Banking System

LISBON (MNI) – The economic outlook for Portugal is particularly
bleak, the country’s central bank said Thursday, noting that the
financial bailout package negotiated with the IMF, the EU and the ECB
foresees a new recession in 2011 of a high magnitude that will persist
in 2012.

This prolonged recession will be accompanied by an unprecedented
contraction of real disposable household incomes and new increases in
unemployment, the central bank said in its annual report.

Still, the adjustment program is “desirable and unavoidable” and
should lay the foundation for sustainable economic growth in the medium
term, it argued.

The temporary pick-up in economic activity last year was partly the
result of unsustainable elements in domestic demand, it noted.

The strategy outlined in the bailout package requires very
substantial consolidation efforts right at the start” and the risks are
not “negligible,” the central bank said.

Some of the risks are “external, namely the possibility of eventual
adverse international economic and financial developments, as well as
uncertainty in regards to the institutional resolution of the mechanisms
of financial assistance in a European context, it said.

The country’s banking system will also face a series of significant
challenges, it said.

The Portuguese economy will register a prolonged period of
adjustment of its structural imbalances, which not only include an
ambitious path of budget consolidation but also a gradual deleveraging
of the current high levels of debt of the different sectors of the
economy, it explained.

This adjustment will imply an additional materialisation of credit
and market risks, which will necessarily apply pressure on the banks’
capital ratios.

The central bank concluded that the application of the adjustment
programme is “desirable and unavoidable,” adding that “these risks
simply strengthen the importance of complying, or even surpassing, the
demanding objectives that were set for Portugal.”

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