Troika to review Portugal bailout, revisions seen

A member of ''Damn the Troika'' movement works on a mural in Lisbon February 24, 2013.

LISBON (Reuters) - Officials from the European Union and IMF start the seventh evaluation of Portugal's economy under its 78-billion-euro bailout on Monday as recession drags on for a third year.

The review is likely to lead to a request by the government for budget deficit goals to be eased as deep austerity undermines fiscal performance for a second year in a row.

Indebted Portugal is mired in its deepest downturn since the 1970s, with unemployment at record levels just under 17 percent, undermining consumers who face the biggest tax hikes in living memory this year.

"With a weaker-than-expected economic situation Portugal will probably get more time from the troika to reduce its deficits as long as the reduction of the structural deficit remains on track," said analysts at Citi in a research note.

"This is a reminder that the planned return of the country to growth and a sustainable fiscal path appears too optimistic to us."

The government and 'troika' of lenders -- the European Commission, European Central Bank and IMF -- had been expecting gross domestic product to contract just 1 percent this year after a slump of 3.2 percent last year.

But the European Commission already downgraded its 2013 forecast for Portugal on Friday, to a contraction of 1.9 percent.

The commission also raised its budget deficit forecast for 2013 to 4.9 percent, compared to the country's official goal of 4.5 percent.

Prime Minister Pedro Passos Coelho signaled last week the country would also struggle to bring the budget gap to below Europe's 3 percent target next year.

But despite the country's deep economic recession, the troika has praised Portugal's reformist drive since it received the bailout in mid-2011. Investors have also shown faith in Portugal's adjustment, by snapping up its bonds in the past year and driving its 10-year yields down to around 6.3 percent now from 17 percent a year ago.

The officials are likely to be further impressed by the country's first bond sale since the bailout -- a 2.5 billion five-year bond issued in January.

Under the bailout, Portugal was originally envisaged to only return to bond markets gradually during the second half of this year.

(Reporting By Axel Bugge; Editing by Stephen Powell)