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EU tackles Portugal debt bailout

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.

Portugal’s bailout, after Greece and Ireland last year, comes at a crunch time as the European Union faces fraught negotiations on setting up a controversial permanent rescue mechanism for wayward eurozone members.

The aim is to set down binding rules for all so as to head off any further bailouts, halting the debt contagion that some believe threatens Spain next.

Spain insisted Friday that Lisbon would be the last eurozone country to need a rescue as Belgian Finance Minister Didier Reynders said 80-85 billion euros ($115-122 billion) would be a “reasonable” assessment of what Portugal needs to put its public finances in order.

Portuguese Finance Minister Fernando Teixeira dos Santos, going into what had been scheduled as a regular EU finance ministers meeting, said his country needed help “not just for half a dozen months.”

Portugal’s minority government collapsed last month after parliament rejected its latest austerity programme and with new polls due June 5, Teixeira dos Santos called on politicians to come together.

The elections complicate the talks, said Luxembourg Prime Minister Jean-Claude Juncker, chair of the 17-strong Eurogroup of finance ministers who will bear the brunt of the cost.

“There is enough money available … The real problem is instead political. Who do we discuss the supplementary programme with?” Juncker said as he went into the talks in Godollo, 30 kilometres (20 miles) north of Budapest.

A related question is how to organise “bridge funding until a new government is being elected,” investment giant Goldman Sachs said in a research note, a type of loan which EU officials have previously ruled out.

If Portugal is to get a bailout, it has to come instead via the European Financial Stability Facility (EFSF), set up with the help of the International Monetary Fund after Greece was saved from default in May.

EU finance commissioner Olli Rehn said the formal request for loans from the EU and IMF, received late on Thursday, would trigger a “multi-annual” programme of Portuguese spending cuts, tax rises and other economic reforms.

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

In exchange for loans, Lisbon will have to slash its budget and austerity measures “must be harder than (those) that the parliament in Portugal voted against,” Katainen said.

The issue is pressing. Portugal must repay some 4.2 billion euros of debt by April 15 and another 4.9 billion euros by June 15, with analysts saying Lisbon could struggle to make the second payment, due just after the polls.

Outgoing Portuguese Prime Minister Jose Socrates threw in the towel after the markets demanded unsustainably higher rates of return on fresh funding, a replay of the Greek and Irish crises before they caved in to the pressure.

Greece’s problems threatened the contagion that snagged Ireland and now Portugal, stoking fears that its neighbour Spain could be next.

Spain’s Finance Minister Elena Salgado insisted again Friday that Portugal would be the last to call in the cavalry, that Madrid had done enough to put its house in order.

“It is completely out of the question” that Spain should follow suit given its “much better track record” and much bigger economy, she said.

Spain’s position as the eurozone’s fourth largest economy is precisely why analysts are fretting over its finances — unemployment is now around 20 percent, the highest in the industrialised world, and its economy has either been in recession or stalled for several years.

But Rehn too backed Madrid, saying he was “certain” that “Spain will overcome its challenges and will not need external financial assistance.”