PORTUGAL MUST MAKE MAJOR EFFORTS: IMF/EU

Lisbon, May 5- IMF chief Dominique Strauss-Kahn and EU Economy Commissioner Olli Rehn warned today that the Portuguese people must deliver 'truly national' and 'major' reform efforts in exchange for a €78 billion bail-out.

As Portuguese finance minister Fernando Teixeira dos Santos announced agreement with the EU and IMF in Lisbon for a debt rescue worth €78 billion, Strauss-Kahn and Rehn stressed in a joint statement issued in Brussels that the success of a 'socially-balanced' programme 'will require a truly national effort'.

'We recognise that this programme will require major efforts from the Portuguese people,' they added of what they termed a 'defining moment' for the country, the third euro zone nation to need emergency international financial help.

Meanwhile, Portugal's economy is set to contract by around 2% in 2011 and 2012 before recovering in 2013 under the debt rescue agreed with the EU and IMF, the country's finance minister said today.

Recovery will be driven by exports, Fernando Teixeira dos Santos told a press conference on the agreement with the EU and IMF for a debt rescue worth €78 billion.

IMF mission head Poul Thomsen told a news conference Portugal's economy will face 'significant headwinds in the next three years', and that the country needed to become much more open to competition to be able to grow again.

The IMF will provide €26 billion, with the rest of the sum coming from the European Union.

Dos Santos said consumption taxes, but not income tax, would rise and that Portugal's debt/GDP ratio would keep climbing until 2013 before falling.

'This is a programme aimed at returning to growth and employment,' he told a news conference.

Officials from the European Commission, the International Monetary Fund and the European Central Bank have been in Lisbon for almost a month to hammer out the agreement.

Portugal's two key opposition parties signalled after meeting European and IMF officials yesterday that they will back the bailout.

The bail-out memorandum, seen by Reuters, showed Lisbon won some leeway from its lenders. This year's budget deficit target was raised to 5.9% of gross domestic product from 4.6% previously.

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

EU officials have suggested that lessons had been learned from very strict terms handed out to Greece when it was bailed out last year, which backfired because investors saw them as unachievable.

Portugal's deal includes up to €12 billion for the banking sector to recapitalise and orders banks to raise their core Tier 1 capital ratios gradually to 10% by the end of 2012, an official source said.

Teixeira dos Santos said the banking measures were aimed at ensuring finance for the economy. He said Lisbon hoped to return to the debt markets towards the end of the three-year bailout programme.

The plan also envisages €5.3 billion in privatisation revenues up to 2013.

The interest rate on Portugal's bail-out loan is expected to be set at a meeting of euro zone finance ministers in mid-May. Portuguese agreement to the loan terms is needed by June 15, when Lisbon has to redeem €4.9 billion of bonds.

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