MS. NARDIN: Welcome to this conference call. The Mission Chief for Portugal, Mr. Poul Thomsen, and Mr. Hossein Samiei, Advisor in the European Department, are here with me. Poul will offer short remarks and then we will open it up for questions.

MR. THOMSEN: Thank you very much. The IMF Executive Board approved yesterday the first review of the program, thereby releasing the next disbursement of about €3.9 billion. The program is on track. In this regard we take note of the fact that the new government has confirmed its commitment to all the key policies and objectives of this program. And that it has announced that it is determined to frontload the implementation of structural reforms relative to the targets laid down in the program.

As far as fiscal policy is concerned, as you know there is some slippage this year, meaning that there is a gap relative to the 2011 fiscal targets. The government has moved quickly to identify corrective measures and we agreed that they should be able to meet the target for the year as a whole. The shortfalls, particularly on the expenditure side, point to some of the weaknesses in Portugal and underscore the need to put in place strengthening of expenditure control and underlying fiscal structural reform.

As far as the 2012 budget is concerned, this is now under discussion. A mission from the Fund, the European Central Bank and the European Commission will return soon to Lisbon to have technical discussions on that. Here the key issue – and the Executive Board underscored that -- is clearly to close the gap -- to the extent that the gap for this year carries over until next year -- with high-quality and permanent measures, focused primarily on the expenditure side. I think that this is the challenge facing the government now, and that is, of course, in line with the basic assumption underlying the program. The fiscal consolidation should come mainly from the expenditure side.

As far as the financial sector is concerned, the Board confirmed our view that developments are in line with the program. They noted that banks have plans for meeting the higher capital adequacy requirements to monitor base means. They also took note of our findings that credit developments are broadly in line with the program. This is clearly an area we need to follow very closely. We certainly want to be sure that the deleveraging that is likely to take place does not jeopardize credit to the prime enterprise sector, does not provide dynamic enterprises from the oxygen needed to create new jobs and growth.

As I said, we are particularly pleased with the government’s determination to accelerate reforms. This program is above all about structural reforms. It’s clear that if the program becomes only, as we have said before, about fiscal consolidation and financial deleverage, it will fail. It is all about structural reform in the end, reforms to open up the economy to more competition and boost productivity over the medium term.

The next step as I said is that a technical mission will return to Lisbon this week to assist the authorities with the preparations of the 2012 budget. Then the full mission for the second review will return to Lisbon in November to assess developments relative to end-September performance criteria.

I will stop here and take your questions.

QUESTION: Thank you. You talk about cutting wasteful expenditure. Could you elaborate a little bit on what that entails? And how would you characterize wasteful expenditure?

MR. THOMSEN: If you have seen the original program document, I think that one of the problems in Portugal is clearly the rapid expansion of current expenditures. Most of the gains from euro adoption in terms of lower interest rates were used to expand the public sector, current spending, and often the perimeter of the public sector to State-owned enterprises (SOEs) and Public-Private partnerships (PPPs). And so you will see that the program is very rich on measures to regain control over SOEs. The program forsees cutting SOEs operational costs by 15 percent

QUESTION: The paper talks about the possible risks. And as we know, those seem to be growing. And it says that there could be disruptive spillovers from a deepening Greek crisis or Greek problems actually you said. Could that come from economic slowdown, banking sector, where exactly could one find those problems creeping into?

MR. THOMSEN: The direct channels of contagion I think are relatively limited. Portuguese banks hold very limited claim on Greece. The direct trade links are limited. But it is a fact that we have seen broader concerns about the periphery spilling over into downgrades and questions about Portugal. We have seen that in the past, but I want to stress that the program has considerable buffers. There is significant injection of liquidity of financing from the IMF and European partners in the first year over and above what is needed to cover medium- and long-term financing and the deficit. For instance, it will allow some reduction, some significant reduction, in the issuance of T-bills. And there are other ways to which the government indebtedness to the banking system is being reduced, and that is in essence buffers in the program. So I do think that the program is actually robust, quite robust, in the short run. There is no doubt that the continued uncertainty about the periphery is also affecting Portugal unfavorably; however, two points here. The government has very deliberately stressed that strong implementation, frontloaded implementation, is the way that Portugal can distinguish itself from other countries with a problem. And secondly, the commitment of European leaders from July 21 to continue to provide financing for as long as it takes and as long as these programs remain on track. That implies that the medium-term outlook in my view has not deteriorated since the program was approved. On the contrary, I think that the commitment of European leaders has certainly reduced the long-term, medium-term uncertainties.

QUESTION: I wanted to ask if the IMF argues that Portugal needs a bolder step on fiscal devaluation. How much of that bold first step for the IMF? And then if the IMF thinks that Portugal has a margin to increase the VAT tax rate from the normal VAT tax rate from 22 percent? Additionally, I just want to ask one more question about the discrepancy between the public debt that the IMF released right now in comparison with the government data. Is there -- what can justify the difference?

MR. SAMIEI: On the issue of fiscal devaluation, we have argued for a first bold move but the exact amount obviously has to be decided. we think a cut in the range of 2 percent of GDP, in Social Security contributions, would be appropriate. However, given the government’s concerns, we have suggested that it is very important to also create buffers to protect the vulnerable groups if the offsetting measure is VAT increases. And also there should be a buffer to offset the risks to achieving the fiscal deficit.

On your second question about VAT, we have done some calculations and it is feasible to bring the intermediate and the lower rates closer together towards the top rates and create sufficient space and offsetting measures. We do not have to increase the top rate, which is indeed relatively high.

If I understood correctly, your last question was about public debt. The explanation is very simple. We include in our definition the amount of money that is provided towards supporting the banking sector and so on. And in that sense, the definition is a bit different from other sources.

QUESTION: Sorry, can you just clarify about the VAT tax rate? You said that a reduced tax rate and the intermediate one would be closer?

MR. SAMIEI: Could be brought closer towards the top rate. Let me put it differently. Although the high rate of VAT is 23 percent, the effective rate is about 16 percent. So that means you could raise the lower rate and even possibly the intermediate rate or merge them or bring them closer, and as a result increase the total effective rate and total collection.

QUESTION: Hi, hello, good afternoon. Just one more question about fiscal devaluation. You said that you were -- that you thought that a 2 percent of GDP raise was appropriate. What I want to know is, is this one thing that you are going to require from the government? This is a central measure in your program? The 2 percent is mandatory?

MR. SAMIEI: This is part of our recommendation, and we have an opportunity to discuss the issue again with the authorities soon when we go to discuss the 2012 budget. And this recommendation is based on the argument that unless the first move is bold, the impact that is required in order to change relative prices or the real exchange rate would not be sufficient. This is a recommendation that to discuss with the authorities next week.

MR. THOMSEN: If I can add to this, the way you should look at these things -- you know, it is not that one insists on one single measure, but this is a very important measure. It’s a key part of the structural reform program. I think if one weakened that, then this raises the question what else would one do to be sure that one gets the anticipated supply response over the economy the next couple of years. Our expectation is that the government will take a bold step in this area and if not, we would want to hear what other ideas it has.

QUESTION: In the IMF report there is one sentence about the bank’s pension fund, and you say that the government guaranteed you that it would only transfer the bank’s pension fund this year and then stop. I want just to clarify that is what you mean, that the government will start and finish the pension fund transfer this year.

MR. THOMSEN: No, that is not what it says, I mean, certainly not what was meant Eurostat consider this transfer above the line revenues. And we feel strongly that such revenues should not be counted in the future as part of the adjustment effort and as a way of meeting the targets for fiscal adjustment. That is what it meant. The transfer will take place as planned, but the transfer will not from 2012 be counted against the need to undertake fiscal adjustment, and there was agreement on that. So that is an important distinction.

MR. SAMIEI: If I may add, the technical memorandum of understanding that was published today, explains the agreement on this issue.

QUESTION: Just about the fiscal devaluation, can I interpret there is kind of a disagreement going on between the government and the IMF, disagreement between what really is a bold first step?

MR. THOMSEN: No. First of all, this is a complicated measure. The calculation is complicated and one needs to be assured that one does it right. The government is committed to a fiscal devaluation, but it was still new in office and it takes some time to do this calibration. So this is still being discussed. The mission that will go out next week will have a discussion of that. I think what I take away from the discussion so far is that the authorities are concerned about risk, and they should be. Of course, they should be concerned about risks. We think that there are measures built into our proposal that will mitigate such risk. Discussion is going on. I do not see any major disagreement at this stage.