PORTUGAL – Portugal is to take over the pension fund of the state-owned postal service to avoid breaking the three percent budget deficit limit set by the European Union’s stability pact.

The news comes just days after the International Monetary fund issued a warning that there are potential tensions between pension reform and the pact.

Finance minister Manuela Ferreira Leite said the government would take over the pension fund of state-run postal service CTT. The government has decided on the extraordinary measure in order to avoid breaking the three percent budget deficit limit set by stability pact. Portugal has exceed the limit for the last two years.

The assets of the fund will be classed as government revenue immediately - while the liabilities will be rolled into the social security system. The EU’s statistical office Eurostat has approved this accounting methodology.

The fund was in deficit before it was taken over. The exact figures for the fund have not been made public but it is known to have been one of the largest in Portugal with assets in the order of one billion euros.

“There’s a sense of disbelief in the markets,” said Bernie Thomas of Watson Wyatt in Lisbon. “Anyone who really understands what is happening feels uncomfortable about how the finances of the country are being managed. Like many others, the Portuguese government is allowing short-term issues to get in the way of addressing long term problems.”

“It’s just a fait diver,” responded Leonardo Mathias, head of Schroders Investment Management in Portugal. “Portugal isn’t Germany,” he said, “So we have to show ourselves to be a good student to make sure we continue to receive structural funds.”

Francisco de Medeiros Cordeiros, general secretary of the Portuguese Association of Pension Fund Managers, also defended the move. “The employees are better off now,” he said, “because their pensions are secured by the state rather than an underfunded pension fund. And the company is better off because without the pension fund liabilities it can now be privatised.”

Dr José Borreicho, the head of CTT’s pension fund management company, was unavailable for comment.