Securing Portugal's deficit

The EU/IMF/ECB troika released a statement on its second review of the Portuguese bailout this afternoon. It was more or less what was expected, with a deeper recession forecast for next year (GDP contracting by 3%) and fears over some over-spending, particularly regionally, which could result in the country missing this year’s deficit targets. Other than that it was light on detail and heavy on the platitudes as with most EU statements these days. (We’ll bring you a full analysis of the report once it is released).

But there was one interesting point which caught our eye:

“The government is seeking to negotiate a voluntary agreement with the major banks to transfer part of the assets and liabilities of these banks’ pension funds to the social security system, so as to allow meeting the 2011 fiscal deficit target of 5.9% of GDP.”

This brought some memories rushing back from our investigation into Portugal for our report earlier this year. Portugal did something similar to this in 2010, where they transferred assets from the formerly state owned Portugal Telecom onto government books but failed to add the liabilities in a timely fashion, as we noted in the paper:

Three pension plans of Portugal Telecom (PT) were taken over into the public social security system. These pension funds are for employees that used to be civil servants at the formerly state-owned firm. The agreement between PT and the government was signed in December and in addition to the assets of the pension funds, PT will transfer a total of €2.8 billion to the government. This amount (around 1.6% of GDP) will be counted in this year’s general government revenues, while there is no change in the official debt figures.

So, the assets transferred boosted the government revenue figures but we suspect that since the long term unfunded liabilities don’t fall into general annual expenditure calculations, they went unnoticed allowing a reduction in the deficit.

Clearly, the statement above suggests that something similar may be done this year. In its statement the Troika does claim that the liabilities will be added as well, but if they are unfunded and merged into the broader pension liabilities of the state, then they may not fall into general government debt and deficit calculations, allowing Portugal to meet its deficit targets through an accounting trick for the second year running...