Portugal signed up to a tough but fair 78-billion-euro international bailout plan on Thursday which will send it into recession for two years with a recovery only likely in 2013, European Union and IMF officials said.

The rescue deal is the culmination of several weeks of turmoil, which led to the government's collapse and soaring borrowing costs, forcing Portugal to become the third euro zone member to seek financial aid after Greece and Ireland.

EU, European Central Bank and IMF officials have spent nearly a month in Lisbon designing the three-year rescue package, which imposes tough austerity and reforms and is expected to be approved by European finance ministers on May 16.

I will be honest, this is not an easy program, it is a tough program, necessary, but we consider it fair, Jurgen Kruger, head of the EU mission negotiating the plan, told a news conference.

The IMF said in a statement it had signed the agreement to lend Portugal 26 billion euros, one third of the total, with the EU accounting for the remaining 52 billion euros.

The package includes steep spending cuts, tax increases and reforms of labor and justice systems as well as privatizations.

A program of this scale, with ambitious targets and an intense pace of implementation, is demanding, said Finance Minister Fernando Teixeira dos Santos.

IMF mission head Poul Thomsen said Portugal's economy will face significant headwinds in the next three years and is expected to contract by 2 percent in 2011 and 2012 before returning to growth in the first half of 2013.

Portugal's Prime Minister Jose Socrates resigned in March, sparking a sharp rise in borrowing rates and credit rating downgrades that led to an aid request on April 7.

A snap general election is now scheduled for June 5 and it will be up to the new government to implement the bailout plan. That political limbo prompted the EU and IMF to seek the support of the main opposition parties for the deal, which they obtained on Wednesday.

The main opposition, the Social Democrats, hold a narrow lead in most opinion polls ahead of the vote.

The success of the program lies also in its swift implementation, so in the present election campaign it should be clear that the next government has to take the responsibility for the program and implement the measures, Kruger said. That will restore confidence in the Portuguese economy.

Speaking in Helsinki, ECB President Jean-Claude Trichet said about Portugal: We are confident. Of course it calls for the present government ... and future governments to do the job.


A key unknown of the loan program is what interest rate Portugal will pay, especially compared with Greece and Ireland.

Kruger said the final rate will be decided by European finances ministers when they meet in mid-May but suggested it could be similar to the rate Greece pays.

Reaching a consensus to approve the deal could still face problems after Eurosceptic parties surged in elections in Finland last month.

Portugal needs the funds from the bailout to be able to meet a bond repayment of 4.9 billion euros on June 15.

Portugal won a delay of deadlines to meet fiscal goals under the loan, something which has prompted some economists to conclude the EU and IMF have learnt from the mistakes of overly tough conditions in the loan to Greece.

But the officials said the two countries' bailouts cannot be compared.

I don't think we can make that comparison to the other countries, every country is unique, this program is tailor-made for Portugal, the IMF's Thomsen said.

Under the bailout, Portugal will now only have to meet a budget deficit target of 5.9 percent of gross domestic product this year, compared with a previous goal of 4.6 percent.

That still represents a sharp cut given the deficit totaled 9.1 percent of GDP last year and, under the deal, it must be lowered to 4.5 percent of GDP in 2012 and 3 percent in 2013.

A return to recession will make it even more of a challenge for the heavily indebted country, which has had some of the lowest growth rates in Europe for a decade, to return to financial health.

(Additional reporting by Sergio Goncalves and Daniel Alvarenga, writing by Axel Bugge, editing by Mike Peacock)