The Portuguese will likely descend into a deep recession over the next two years, after Lisbon country signed terms of a bailout from the European Union, warned the country’s finance minister.

Fernando Teixeira dos Santos said that austerity measures stipulated as a condition of the 78-billion euro ($116-billion) rescue package will mean the Portuguese economy will contract by 2 percent this year and next.

Such austerity measures – which include sharp tax hikes, dramatic spending reductions, privatizations, pension cuts – have already prompted widespread protests in the small, debt-ridden nation.

Portugal will also be compelled to significantly restructure its banking sector.

Juergen Kroeger, head of the European Commission, told media in a Lisbon press conference that the bulk of the bailout fund (52-billion euros) will come from the EU with the remainder coming from the International Monetary Fund (IMF).

The Portuguese program is designed to reduce the deficit to the EU-mandated level of 3 percent of GDP by 2013 (from the present figure of 9.1 percent).

Kroeger conceded that austerity measures will be tough on the Portuguese, but necessary.

These are major structural reforms that are aimed at fostering competitiveness, he said.

Poul Thomsen, team leader of the IMF mission, also warned that Portugal's economy faces significant headwinds in the next three years.”

Dos Santos himself commented that: This is a program aimed at returning to growth and employment.

Meanwhile, Portugal will convene a general election next month, following the collapse of the prior administration. The bailout agreement became possible after Portuguese two principal opposition parties gave their support to the funding package.

Jonathan Loynes and Emilie Gay, economists as Capital Economics in London, commented that “both the Greek
experience and Portugal’s own position suggest that the bail-out is very unlikely to mark an end to the country’s
problems.”

Loynes and Gay added: “While the confirmation of the bail-out… should provide some reassurance that Portugal will be able meet its upcoming bond redemptions, it won’t put an end to speculation that – along with Greece and perhaps others – it will sooner or later need to undertake some form of debt restructuring.”

European union IMF Gdp Portugal