Despite aid request, Portugal's outlook uncertain

AP News
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Posted: Apr 07, 2011 4:23 PM
Despite aid request, Portugal's outlook uncertain

Political and economic uncertainty clouded Portugal's future Thursday as it remained unclear who would negotiate the terms of its requested bailout, how much it would be and when it would arrive.

A day after the caretaker government asked for rescue loans from its fellow EU nations, bank stocks that have suffered recently led a rally on the Lisbon stock exchange Thursday. But the yield on Portugal's 10-year bonds barely budged from the unsustainable high of 8.5 percent as investors remained wary of the debt-heavy country's fate.

It was uncertain how much Portugal might receive in a bailout, how soon it could get the cash and _ crucially _ under what terms, as rescue packages come with fiscal policy strings attached and have to be paid back sooner or later.

The country is being run by a caretaker government ahead of a June election, making it hard for foreign negotiators to know who they'll be dealing with for the next four years. Added to that, Portugal is forecast to enter a double-dip recession this year, denying it the growth it needs to pull out of its debt hole. And trade unions, angrily blaming the bailout on bankers, promised more strikes and street demonstrations.

The European Commission, the EU's executive, said late Thursday it received Portugal's formal request for aid. A delegation from the Commission and the European Central Bank is expected in Lisbon "very soon" to begin negotiating the terms of a financial rescue package, including how much Portugal might need, Cabinet Minister Pedro Silva Pereira said earlier in the day without elaborating.

Analysts predict Portugal will need up to euro80 billion ($114 billion) _ equivalent to about half its annual gross domestic product.

The country's European partners have long pressed it to accept help, and some were angry that Lisbon left the bailout request so late.

"There is so much obscurity in this and there are so many things that have been handled badly, so first these things have to be sorted out," Sweden's Finance Minster Anders Borg said.

"In this difficult situation, we will end up with complex and arduous solutions, because it isn't possible to create a complete program if you don't have a government and instead it will be about forming different bridge solutions," Borg told reporters in Stockholm. "This means they have put the surrounding world in a very awkward situation."

But German Foreign Minister Guido Westerwelle welcomed Portugal's decision. "This will, we think, tend to calm the situation and it is a contribution to containing the problems and minimizing the danger of contagion," Westerwelle said in a speech in Berlin.

Portugal is already one of the eurozone's poorest countries, and a steep rise in its borrowing costs over the past year has made its financial situation unsustainable. Two rating agencies downgraded its bonds to one notch above junk level in recent days.

That deterioration, which raised the specter of bankruptcy, forced Portugal to announce late Wednesday it is following Greece and Ireland into asking for aid from Europe's bailout reserve and the International Monetary Fund.

Jeremy Batstone-Carr, an analyst at Charles Stanley & Co., said the risk remains that Portugal could soon default.

"The difference is that unlike Greece and Ireland, Portugal is, to all intents and purposes, already bankrupt and has no government to manage either the loan or the austerity program. This takes the peripheral eurozone crisis to another level," he said.

The European Commission, eager to stamp out any sign of a flare-up in the continent's debt woes, said it would act swiftly on any bailout request from Portugal. RBS European Economics said it expected Lisbon to receive a first lump sum by the end of May.

Authorities need to move quickly. Portugal has to repay a euro4.5 billion ($6.4 billion) loan that falls due next week, though analysts expect it can meet that. Then it must come up with almost euro7 billion to roll over a bond and make interest payments in June. Meanwhile, it still needs to collect funds to keep the country running.

There was good news, though, for Portuguese banks which have taken the brunt of investor fears and have had to rely heavily on liquidity assistance from the ECB. Their stock prices surged by up to 5 percent, helping the main Lisbon index rise 1.2 percent and making it one of Europe's best performers.

The outgoing government has battled for 12 months to avert a bailout, introducing tax hikes and cuts in pay and welfare benefits to restore market faith in its prospects. It quit two weeks ago after opposition parties rejected a fresh set of spending cuts.

The main opposition Social Democratic Party has said it supports budget cuts. Its leader Pedro Passos Coelho said he will back a request for "a minimum level of help" ahead of a full bailout, but did not elaborate.

The austerity measures, coupled with a decade of flimsy growth and rising debts, have squeezed domestic spending and worsened Portugal's dire financial condition. Bailout terms would likely tighten those measures, lowering living standards and raising unemployment, which last year stood at a record 11.2 percent.

Marc Ostwald, a market strategist at Monument Securities in London, said it remained to be seen whether the goals of a rescue package are achievable for Portugal.

He said "the more pertinent issue is whether the new government will have the stomach to implement long overdue reforms, which will clearly meet with much public resistance."

Recent policies to reduce the country's debt load have triggered a series protests and strikes, and the civil servants' union announced a walkout May 6.

Some 340,000 Portuguese are on the minimum monthly wage of euro485 before tax, and 1.4 million take home less than euro600 a month, making further cuts unpalatable for many.

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Malin Rising in Stockholm, Gabriele Steinhauser in Budapest and Geir Moulson in Berlin contributed to this report.