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Troika inspectors gear up for Portugal bailout review

LISBON (Reuters) - Debt-ridden Portugal's international lenders will next week begin assessing the country's compliance with the terms of its 78-billion euro bailout, against a backdrop of concerns it may eventually have to sign up for a second rescue package.

Inspectors from the European Union and International Monetary Fund start work on their third quarterly audit next Wednesday, the government said on Thursday.

The troika of lenders said last November they were satisfied with Portugal's performance but its sovereign debt yields spiked recently, calling into question its ability to return to the bond market in the second half of 2013, as dictated by its bailout deal.

That has raised concerns that, with a brutal recession showing no signs of ending, it might need to follow Greece in seeking a bailout extension, while Lisbon was forced to deny earlier this month it had already sounded out advisers on options for a debt restructuring.

After soaring to record highs of over 17 percent in late January, Portugal's benchmark 10-year bond yields have since rolled back to around 13.5 percent.

Portugal has already received around 40 billion euros of rescue funds under its current program, which dictates painful austerity measures to meet tough budget deficit goals aimed at re-establishing investor confidence in the country.

It met its 5.9 percent of GDP public deficit target for 2011, but only thanks to an extraordinary transfer of nearly 6 billion euros from banks' pension funds to state coffers. This year's deficit target is 4.5 percent.

During their last visit, the lenders told Portugal to avoid relying on one-off measures to hit its targets in future and to deliver on structural reforms by modernizing an inflexible labor market and a snail-paced justice system.

The government clinched a pact with employers and some of the key unions on labor reform last month, which should allow it to boost competitiveness by making it easier for companies to fire and hire, also lowering lay-off costs.

On Thursday, the cabinet approved the liberalization of the country's electricity and gas markets, which phases out regulated prices for energy as demanded under the bailout, with a view to encouraging greater competition and lowering tariffs.

Starting from July, consumers will switch to floating market prices, although a transitional period until the end of 2014 allows them to choose between market prices and regulated ones that include a surcharge.

The troika's inspectors will remain in Portugal for about two weeks, analyzing compliance and planning for coming quarters with the government, it said.

(Reporting By Andrei Khalip, Daniel Alvarenga; Editing by John Stonestreet)

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