EU sets out debt defences as Portugal fears rise

25th March 2011, Comments 0 comments

Europe set out its arsenal to prevent a repeat of a year-long debt rollercoaster, amid rising expectations that Portugal needs a 75-billion-euro bailout after hefty credit rating downgrades.

A two-day European Union summit called to seal the bloc's "comprehensive" response to a debt crisis crossed a major hurdle Thursday when partners conceded to a last-minute German demand.

Berlin successfully argued that the timeframe for contributions to a future, 700-billion-euro rescue fund should be renegotiated.

But after last year's massive bailouts to Greece and then Ireland, Portugal edged a little closer to the brink Thursday.

New York-based Standard and Poor's lowered its rating for Portugal's long-term public debt by two notches to BBB, -- hours after London's Fitch Ratings took it down by two notches, from 'A+ to 'A-'.

Those decisions came after Portugal's parliament rejected the government's latest austerity package, prompting prime minister Jose Socrates to resign late Wednesday.

But Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of eurozone finance ministers, insisted Thursday: "Portugal won't be left exposed by its European partners."

Should Lisbon require assistance, Juncker suggested 75 billion euros (almost $100 billion) would be "appropriate" -- but only "under strict conditions."

Top EU figures nevertheless warned Portugal there could be no escape from fierce budget savings.

European Central Bank chief Jean-Claude Trichet said it was "capital that Portugal would confirm plans that had been designed and approved by" EU institutions.

Officials ruled out a decision on an emergency financial rescue for Portugal until it was clear who would govern the country. Commission head Jose Manuel Barroso, a former Portuguese premier, said a bailout had not even been discussed at the summit.

He added that Socrates, who is now acting as caretaker prime minister, had vowed that commitments made with eurozone partners would be respected whoever won upcoming elections.

Socrates "made it clear" that "all the commitments in terms of the fiscal targets will be respected," Barroso said.

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

It is trying to bring its public deficit down from a record 9.3 percent of GDP in 2009 to 4.6 percent this year.

Current money market rates of nearly 7.5 percent for the funds it needs are, though, considered unsustainable.

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

EU president Herman Van Rompuy deemed the broader defences laid out for the future "a quantum leap" for the 27-state bloc.

The plan provides for the creation of a permanent war-chest -- the European Stability Mechanism.

"We confirmed the 'operational features' of the permanent Stability Mechanism," Van Rompuy said, to "make sure that 500 billion euros are available with triple-A status."

Contrary to a deal struck Monday between finance ministers, he said 80 billion of "paid-in capital" provided by eurozone states will now come from July 2013 in five equal annual installements.

A bid to boost a temporary facility pre-2013 and give it an effective lending capacity of 440 billion would be in place in June, he added: Finnish President Mari Kiviniemi had made it clear that she could not increase Helsinki's share of funding guarantees before the April 17 elections.

Notionally worth 440 billion euros, in reality the fund today is capable only of lending around 200 billion.

Earlier Thursday, up to 20,000 protesters denounced a new "Euro Plus Pact" unveiled the same day, which asks adherents to work off annual targets against economic benchmarks -- to ensure economic policies converge.

The protesters were angered by plans to cut European wage levels and raise retirement ages to make Europe's economy more competitive.

Non-eurozone states Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania signed up to the new wishlist of goals. But Sweden, Hungary, the Czech Republic and Malta opposed the pact.

In early trading on the Asian markets Friday, the euro retained its strength against the US dollar: it bought $1.4179 from $1.4176 a day before. It also changed hands at 114.81 yen from 114.12.

© 2011 AFP

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