EU says Portugal needs about $114 billion in aid

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Posted: Apr 08, 2011 3:52 PM
EU says Portugal needs about $114 billion in aid

Europe's top financial officials said Friday that Portugal will need around euro80 billion ($114 billion) in rescue loans, but a tense election campaign in the debt-ridden country is set to complicate reaching a deal with opposing political parties.

A full-fledged adjustment program should be in place by mid-May, allowing the debt-ridden country to meet huge bond repayments in June, the EU's Monetary Affairs Commissioner Olli Rehn said.

Rehn said that the program would have to be agreed by all major political parties, to ensure that it will be implemented after elections in early June, which will likely heave the opposition into power.

International Monetary Fund Director Dominique Strauss-Kahn said Friday that IMF had received a request for financial assistance from the Portuguese authorities, and was prepared to move "expeditiously" and hold "swift discussions" with the government.

However, Portugal's acting Finance Minister Fernando Teixeira dos Santos quickly thwarted hopes of cooperation between the opposing political forces, saying the caretaker government will not talk directly to the opposition and that any talks would have to be led by the European authorities and the IMF instead.

"The negotiations are not the government's responsibility," Teixeira dos Santos told reporters after meeting his European Union counterparts in Godollo, a small town just outside Hungary's capital, Budapest.

Portugal this week became the third country in the eurozone to request international help, after last year's multibillion rescue packages for Greece and Ireland from the EU and the IMF.

While a rescue of Portugal had long been anticipated and its cash needs can easily be met by Europe's existing financial backstops, the country's political situation makes reaching a final deal more difficult.

Prime Minister Jose Socrates resigned late last month after opposition parties rejected unpopular spending cuts and tax increases that the government said were necessary to get the country's struggling economy back on track.

EU finance ministers said Friday that the economic adjustment program that accompanies the rescue loans will have to go beyond the measures rejected by the opposition.

Rehn urged the different political parties to "realize their major responsibility of overcoming the current difficulties."

Experts from the European Commission, the EU's executive, the European Central Bank and IMF will travel to Lisbon soon to take a close look at the country's books, Rehn said, adding that the euro80 billion loan was based on "very, very preliminary estimates" and that nailing down a final amount will require several "weeks of empirical work."

Any program will be based on strict conditions to ensure that Portugal will eventually be strong enough to repay its creditors and will most likely last for three years, Rehn said.

It will require not only cuts in government spending, but also reform measures designed to make Portugal's economy more competitive, Jean Claude Juncker, the prime minister of Luxembourg and the main spokesman for the euro countries, said.

On top of that, the loans will most likely include a "specific allocation" to shore up Portugal's banks, Rehn said. Portugal's banks have lent heavily to households and businesses and have relied on ECB emergency funding for months.

Rehn added that Lisbon will also have to sign up to an "ambitious privatization program" to help it meet its funding needs.

European officials hope that aid for Portugal will finally draw a line under the debt crisis that has crippled the continent for more than a year.

"The predominant view in markets is that this step ring-fences the three weaker economies of the euro area and therefore helps to avoid wider contagion," said Klaus Regling, who manages the European Financial Stability Facility, the eurozone's main bailout fund.

He said larger countries like Spain won't be drawn into the crisis, because financial markets now have a much better understanding of "the economic fundamentals in the different member states of the euro area."

"The risk of contagion is much less than six or nine months ago," Regling added.

Once a program for Portugal is in place, the EFSF, which issues bonds to finance rescue loans, should be able to act within about ten days, Regling said.

Although the bailout request from Portugal has taken some pressure off other struggling eurozone economies like Spain and Italy, Friday's news conference also pointed to the challenges ahead.

Portugal's government was not the first in the eurozone to collapse amid anger over austerity measures, and doubts are growing over how much longer citizens in debt-ridden countries will accept painful cuts and radical overhauls of traditional privileges, such as early retirement ages and protected professions.

Greece, which almost a year after being rescued is still wallowing in recession, received a warning Friday not to fall behind in implementing the reforms that form part of its program.

"We reminded the Greek authorities that it is important to stick to the targets for public deficit in the next few years," Juncker told journalists.

There are concerns that some of the reforms passing through Greece's parliament are not being implemented in practice, while government revenue remains below expectations because of the recession and widespread tax evasion.

Analysts warn that a loss of political will to stick to harsh adjustment programs may still lead one or more of the eurozone's weakest members to default on some of their debts, which in turn would trigger problems for banks in larger states and could ring in a new round of the crisis.

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Barry Hatton in Lisbon contributed to this story.