Home News EU prepares multi-billion bailout for indebted Portugal

EU prepares multi-billion bailout for indebted Portugal

Published on 08/04/2011

EU finance ministers thrashed out Friday a multi-billion-dollar debt rescue for Portugal, demanding tough conditions as they try to draw a line under a destabilising debt crisis.

The third EU bailoiut tow member states within a year will need to be around 80 billion euros ($115 billion) EU finance commissioner Olli Rehn said.

Loans to Lisbon, after Greece and Ireland last year, will be conditional on more public spending cuts, tax rises and far-reaching privatisations — negotiated with Portuguese politicians facing an angry, fearful electorate around June 5 polls.

The decision to act was taken after outgoing Portuguese premier Jose Socrates threw in the towel on the eve of scheduled talks at a Hungarian castle and formally requested financial aid.

Like Dublin and Athens beforehand, the cost of borrowing for a caretaker government whose latest attempt to rejig its books collapsed in parliament last month comes as the EU is locked in controversial negotiations over a permanent rescue mechanism for wayward eurozone states.

The aim is to set down binding rules once and for all, and contain debt contagion that some believe now threatens Spain — an economy bigger than those of Greece, Ireland and Portugal put together.

Rehn revealed the “likely” final sum, worth $115 billion, after talks in Godollo, 30 kilometres (20 miles) north of Budapest, that were joined by non-euro states including Britain, also locked into agreements to help EU rescue action.

One-third funded by the International Monetary Fund, the deal should be conditional on “an ambitious privatisation programme,” as well as labour market reform and “measures to maintain the liquidity and solvency of the financial sector,” Rehn said.

Ministers “invited the European Commission, the ECB, the IMF and Portugal to set up a programme and take appropriate action to safeguard financial stability” across the 17-state eurozone, Luxembourg Prime Minister Juncker said.

“Financial support will be provided on the basis that a policy programme will be supported by strict conditionality negotiated with the Portuguese authorities, duly involving the main political parties,” he stressed.

A “cross-party agreement” is to be “adopted by mid-May and implemented swiftly after the formation of a new government” in June.

European Central Bank head Jean-Claude Trichet said it was “essential” that structural budgetary adjustment lay at the heart of the plan, and that the “hard work” should “begin immediately.”

“The package must be very strict,” warned Finland’s hawkish Finance Minister Jyrki Katainen.

The decision came after Spain was again forced to insist going into the talks that it was determined to ride out its problems, despite stubborn high unemployment and a stagnant economy struggling to climb out from under a property market crash.

Spain’s Finance Minister Elena Salgado expressed her belief that Portugal would be the last to call in the cavalry, describing it as “completely out of the question” that Madrid should follow suit.

The head of the European Financial Stability Facility (EFSF), Klaus Regling, said the “predominant view on markets” was that Portugal’s bailout “ring-fences the three weaker economies in the euro area and therefore helps avoid wider contagion.”

He said an absence of movement on risk attached to Spanish sovereign bonds over recent days “confirmed” that impression.

Lisbon must repay some 4.2 billion euros of debt by April 15 and another 4.9 billion euros by June 15.

But the real problem with Portugal is “political,” Juncker earlier warned, insisting there was enough money even to cope with Spain. “Who do we discuss the supplementary programme with?” he underlined of the Portuguese electioneering backdrop.

Despite successive credit-rating downgrades pushing Portugal into a replay of the Greek and Irish crises, the EU sees the three bailouts as a freak constellation of circumstances combining dodgy data in Greece, unregulated banks too big for little Ireland and out-of-date economic modelling in Portugal.