Lisbon to set up independent budgetary body, PM-elect says

Portuguese prime minister-elect Pedro Passos Coelho plans to set up an independent budget office to enhance transparency and curry favor with the markets as he begins the task of making the country's 78-billion-euro bailout plan a success.

"We have to be absolutely transparent with the markets," Passos Coelho said in an interview with French financial daily Les Echos, posted on its website. "The first measure will be to create a budgetary authority independent of the government. This new institution will be created by the two independent institutions in Portugal which are the Bank of Portugal and the Court of Auditors."

Passos Coelho said it was absolutely necessary for Portugal to trim its budget deficit to 5.9 percent of GDP this year and to 4.5 percent the following year, as well as meeting all the other conditions imposed by the International Monetary Fund and the European Union in exchange for emergency funding. "I hope our action will mark the difference between Portugal and Greece," which is negotiating further assistance from the EU.

A whole battery of measures need to be in place before the end of July in order to comply with the terms of the loan from the IMF and Passos Coelho is in a rush to get a government in place in order to do so.

Outgoing Finance Minister Fernando Teixeira dos Santos is preparing a dossier for the incoming administration that highlights the "most urgent" measures that need to be introduced by the end of the year.

Teixeira dos Santos said the requirements are demanding. "You only have to look at what's happening to Greece to understand that Portugal cannot fail; I think the new government faces a big challenge."

Meanwhile, the Bank of Portugal on Tuesday urged the country's lenders to increase their solvency levels by offloading non-core assets and increasing deposits as part of gradual deleveraging.

"Banks need to give priority to strategies that strengthen their capital base by selling loans or non-strategic assets and [...] to reinforce stable financing, namely through deposits," the central bank said in its latest financial stability report.

The government's debt problems have squeezed Portuguese lenders out of the wholesale markets, making them heavily dependent on the European Central Bank for financing. Local banks borrowed 47.2 billion eurosfrom the ECB in May, down slightly from April's level.

Portugal's bailout program from the IMF and the EU also includes measures to reinforce the banking system. Some 12 billion eurosof the loan has been set aside to help banks recapitalize if they are unable to do so privately.

Portuguese banks will now have to have a minimum core capital ratio ofnine percent of risk-weighted assets by the end of this year and 10 percent by the end of 2012. They need to provide the central banks with their plans for meeting the new solvency requirements by the end of this month.