IMF, EU to work on realistic deficit reduction: Expert

Greece got a bailout of 110 billion euro a year ago. Ireland signed 85 billion euro bailout last November. Now, Portugal has agreed to 78 billion euro of a bailout in May 2011.

Sarah Hewin, Head of Research-Europe at Standard Chartered Bank, in an interview with CNBC-TV18's Menaka Doshi, discuss implications of the bailout package, whether that number will be enough and what it means for the peripheral countries in the EU.

Below is the verbatim transcript of the interview. Also watch the accompanying video.

Q: Does this look like a good number? Do you think that if we manage to get the political consensus in Portugal post elections to back this bailout, will it put to rest the fear of Portugal defaulting on debt?

A: The number is totally inline with the expectations. The 78 billion euro financed over three years. It is an agreement from all political parties and in particular the main opposition party.

It’s an issue put to rest concerns about the need for restructuring a Portuguese debt over the next year or so. Restructuring risk across the euro area will not go away. The Portuguese bailout package at least postpones about that in Portugal’s case for over a while.

Q: In Portugal’s case, many analysts are pointing out that at least this bailout seems to take into account more realistic budget deficit numbers over the next few years. We have been told about 5.9% of GDP this year, 9.1% in 2010, 4.5% over the next year and 3% in 2013. The package does not involve very substantial cuts in public sector wages of the minimum national wage nor any public sector dismissal. It might help this package to go through politically. The effectiveness of the package is called into question. Doesn’t it means very less discomfort on the wage or cuts in jobs front?

A: It’s a matter of guessing the balance. You have been trying to achieve to put debt and deficit on a more sustainable part by reducing deficits and debt as well.

One has to make sure that this is achieved without causing pain to the economy, where we have a prolonged recession. If the economy goes into a deep recession which lasts over the course of several years, it would not have a counterproductive effect. We would end up with our debt to GDP ratio worsening rather than improving.

The IMF and EU's approach would be to go for a realistic reduction in the deficit. It will inevitably mean austerity, but it shouldn’t squeeze the economy that there is a prolonged recession.

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