EU leaders warn no Portugal bailout without harsh cuts

24th March 2011, Comments 0 comments

European leaders warned Portugal Thursday that there can be no bailout without painful budget cuts as expectations grew of a 75-billion-euro cry for help from Lisbon at a crunch EU summit.

Led by German Chancellor Angela Merkel, a string of top figures insisted Lisbon's options were limited, with massive savings on spending required, even if it opens negotiations on a financial rescue package, like Greece or Ireland beforehand.

The two-day EU summit, starting at 1600 GMT in Brussels, had been called to bolster defences amid a eurozone debt crisis, but was rocked by the overnight resignation of Portuguese premier Jose Socrates.

Socrates fell following his parliament's rejection of a new national austerity plan, and is attending the summit in a mere caretaker capacity.

The European leaders also had to swallow a last-minute demand from economic powerhouse Germany to renegotiate its contribution to future bailout funds.

And echoing weekend protests in Portugal, masked protesters hurled rocks at police who hit back with water cannon in Brussels as thousands marched to voice their anger at austerity measures including plans to cut European wage levels.

Diplomats virtually ruled out any EU decision on an emergency financial rescue for Portugal during the talks, but Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of eurozone finance ministers, said aid of some 75 billion euros (almost $100 billion) would be "approriate."

European Commission chief Jose Manuel Barroso, a former Portuguese premier himself, warned that the cuts voted down by parliament in Lisbon remain "indispensable for confidence in the European economy."

Juncker also said new "savings" are needed in Lisbon and warned any bailout will only be granted "under strict conditions."

Merkel stressed that "it is very, very important that all those who speak in Portugal's name state clearly their attachment to the objectives of this programme," which is to rein in the national deficit.

In Brussels for preparatory talks among centre-right allies, the head of Portugal's main opposition Social Democratic party, Pedro Passos Coelho, said he "hopes" debt-ravaged Lisbon can avoid calling in aid.

But in a sign of domestic bickering, he added: "The current government no longer has a mandate to negotiate a bailout."

"Obviously we're all worried," Dutch Prime Minister Mark Rutte said, adding it was a "prerequisite" that a new austerity package be steered through the Portuguese parliament.

Belgium's finance minister Didier Reynders, an integral part of EU negotiations on Ireland's bailout in November, said the EU was "ready to step in and help, but Portugal has to ask first."

Lisbon faces increasing borrowing costs in the countdown to bond repayments amounting to nine billion euros falling due by June 15.

Portugal's public deficit hit a record 9.3 percent of GDP in 2009 and current money market rates of nearly 7.5 percent are considered unsustainable.

A Portugal bailout would come at the worst possible time, because it would have to be sourced from a temporary European Financial Stability Facility.

Notionally worth 440 billion euros, in reality the fund today is capable only of lending around 200 billion, allowing for a buffer to make it profitable for participating states.

Finland has excluded any increase in EFSF guarantees before April 17 elections, and German Chancellor Angela Merkel said she wants to re-negotiate Berlin's contributions to a permanent European Stability Mechanism aimed at replacing the EFSF in 2013.

Merkel wants to spread over five years a 22-billion contribution to "paid-in" capital underpinning the yet-to-be 700-billion-euro ESM ($996 billion), alongside guarantees designed to cover a lending ceiling of 500 billion.

Originally, Germany was to pay in 11 billion in 2013, and the rest over three years.

Juncker warned that delaying payments could rob the rescue fund of its top AAA credit rating.

© 2011 AFP

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