EU/IMF start Portugal bailout review, focus on slippage

LISBON (Reuters) - EU and IMF officials launch their first review of Portugal's international bailout on Monday, with the focus on how the government plans to correct a budget slippage and meet its promised fiscal targets this year.

The verdict on Lisbon's efforts to meet the terms of the 78-billion euro rescue package agreed in May, will help determine whether the lenders release a second tranche of funds or set additional conditions for doing so.

They will also serve as a litmus test to show markets whether Portugal can avoid following Greece in requesting a second bailout.

The quarterly review, set to last around two weeks, will assess the government's progress on measures including tax hikes, spending cuts and structural reforms.

Last week, Fitch Ratings postponed its decision on Portugal's credit standing to the fourth quarter from the end of July, saying its review will take into account the results of the first EU/IMF review.

Fellow agency Moody's has cut Portugal's rating to junk status, citing concerns that the country may follow Greece in needing a second bailout from the international bodies.

Portugal's bond yields have fallen somewhat since European leaders agreed a new rescue package for Greece and eased the terms on existing bailout loans for all three of the euro zone countries bailed out in the debt crisis to date.

Prime Minister Passos Coelho's Social Democrats, who rule in a coalition with the rightist CDS-PP, met another deadline on Sunday by selecting a buyer for failed bank BPN.

Still, the government is under pressure to demonstrate how it plans to correct a budget slippage of around 2 billion euros it says it inherited from the previous Socialist government.

Under the bailout terms, Portugal has to cut the budget deficit this year to 5.9 percent of gross domestic product from 2010's 9.2 percent.

Finance Minister Vitor Gaspar has said the budget slippage relates to late payment of salaries and unpaid debts at ministries, an inventory of which is due to be provided to the troika.

The government last month announced an extraordinary 50 percent levy on year-end bonuses, set to raise around 1.25 billion euros in tax revenues, but has yet to detail spending cuts to cover the remainder of the slippage.

(Reporting by Shrikesh Laxmidas; editing by Patrick Graham)