Portugal is now the third eurozone debt rescue case, with an EU-IMF bailout of 78 billion euros to avoid default, but the conditions as well as the key reaction of opposition parties remain unclear.
“The government has reached a good agreement that defends Portugal,” outgoing Prime Minister Jose Socrates announced on television, but the country got a rough ride on Wednesday when it had to pay sharply increased rates to borrow money.
A deadline looms on June 15, six weeks away, when Portugal must redeem old loans of nearly 5.0 billion euros ($7.3 billion) and avert default. The country now joins Greece and Ireland as eurozone lame ducks on bailout crutches held out by the EU, ECB and IMF.
Socrates signalled that in one sense the conditions of the deal give Portugal some extra breathing space to control its debt.
He said that the deal worth $116 billion “is a three-year programme which sets more gradual deficit reduction targets: 5.9 percent this year, 4.5 percent in 2012 and three percent in 2013.”
Portugal had previous targets of 4.6 percent this year, 3.0 percent in 2012 and 2.0 percent in 2013. The EU ceiling is 3.0 percent.
The experts from the three external institutions met opposition right-wing parties on Wednesday to obtain their support for the corrective measures which condition the bailout if they win an early election on June 5.
The opposition precipitated the election in March by rejecting cutbacks to fight the debt mountain.
For the centre-right Social Democratic Party, Carlos Moedas said: “By the end of the afternoon or tomorrow morning the SPD will give its decision to the mission on what it has read.”
The International Monetary Fund, the European Central Bank and the European Union were to meet the minority right-wing CDS party later in the day.
Press reports suggest that the structural reforms needed will be less severe than those imposed on Greece but will require additional budget savings of 8.8 billion euros in 2012 and 2013.
Income tax would rise, the highest pensions would be cut, and the length and amount of unemployment benefit would be trimmed, they say.
A privatisation programme already announced would be extended with the sale of national airline TAP and the electricity distribution network.
Portugal would have to pay interest on the rescue money at two percentage points above the rate paid by the European Financial Stability Facility, which would mean 4.68 percent, and 12.0 billion euros of the borrowed money would be used to strengthen the banks.
In this fevered climate, Portugal went ahead with an operation to raise funds for three months, and did borrow 1.117 billion euros ($1.65 billion) but had to pay interest of 4.652 percent, sharply up from 4.046 percent when the last such issue was made on April 20.
At Carregosa Bank, bond strategist Filipe Silva said: “There is no doubt that the rate is very high for such a short-dated issue.”
Socrates announced the deal late on Tuesday after long negotiations.
Lisbon had fought hard against a rescue, but it succumbed last month to pressures from financial markets and from within the EU, where there was concern that a debacle for Portugal could drag down Spain.
The public debt here amounts to nearly 160.4 billion euros, representing 93.0 percent of gross domestic product. The ceiling for eurozone countries is 60 percent.
The central bank expects the economy to contract by 1.4 percent this year.
Meanwhile there is deep concern on financial markets that Greece might have to restructure its colossal debt.
Socrates said: “International institutions have recognised that the Portuguese situation is a far cry from those in other countries.”