Portugal bailout terms severe, EU says

AP News
|
Posted: May 04, 2011 12:23 PM
Portugal bailout terms severe, EU says

Portugal's bailout terms are "severe" and no more lenient than those Greece and Ireland received, EU officials said Wednesday in an effort to dodge any outraged claims of double standards.

In announcing an imminent euro78 billion ($115 billion) bailout, Portugal's caretaker prime minister claimed he had won easier terms than those imposed on the other two countries last year. The deal cut by the outgoing government ahead of a June election still requires approval from other political parties, but a softening in conditions could fuel demands to revise Greece and Ireland's deals.

"He sold his highlights of the agreement," said an EU official, speaking on condition of anonymity because negotiations were continuing, of Jose Socrates' announcement on Portuguese television Tuesday night. "You have to take into account that they are in an election campaign."

Portugal has battled during more than two weeks of negotiations to escape bailout terms that might hurt its efforts to restore economic growth, with a senior member of the governing Socialist Party saying the previous two bailouts had been "a huge failure."

Greece and Ireland have chided their creditors for imposing conditions that threaten to thwart their attempts to rebuild their economies. Though official details of Portugal's agreement may not be made public before Thursday, Athens and Dublin will be watching closely for signs they can hope for easier payback terms.

Socrates said Portugal had won "a good deal" that spared it from public sector pay cuts and layoffs, a reduction in the minimum salary, the elimination of Christmas and vacation bonuses, and changes to the retirement age.

Portugal won't escape austerity, however. The proposed bailout terms include hikes in sales, property and health service taxes; unemployment benefits cut to 18 months from three years; and cuts to state pensions that are over euro1,500 ($2,217) a month.

Planned privatizations include flag carrier TAP Air Portugal and airport management company ANA, the national mail company CTT, and stakes in energy company EdP and national electricity distribution company REN.

Major public works projects, such as a high-speed rail link to Spain, are to be postponed.

Portuguese banks are expected to receive euro12 billion ($17.7 billion) of the bailout sum to ease their liquidity problems. That news sent their shares sharply higher on the Lisbon stock exchange, with Banco Portugues do Investimento soaring 4.9 percent.

The interest rate on the rescue loans _ a crucial aspect of the bailout deal _ has not been revealed yet.

"The international institutions have acknowledged ... that Portugal's circumstances are very different from those of other countries and very different from the picture that some people here would like to paint," said Socrates, who handed in his resignation in March but remains in office until elections in early June.

Details of the final agreement will be announced once there is support from opposition parties, most likely on Thursday, the EU official said. The deal is being negotiated by delegates from the EU, the European Central Bank and the International Monetary Fund.

"It is a severe adjustment anyway," the official said of the bailout program, adding that most of the spending cuts and structural reforms would have to come this year and next. His assessment was supported by a second official, who also declined to be named.

Portugal is getting an extra year _ until 2013 _ to cut its budget deficit below the EU's 3 percent ceiling, but that extension was necessary after the country disclosed a much larger than expected budget shortfall for last year. The country now has to reduce its deficit to 5.9 percent by the end of this year from 9.1 percent in 2010, and to 4.5 percent in 2012, Socrates said.

The EU wants all major parties in Portugal to support the bailout program to ensure it will be implemented in full, no matter who takes power after the June 5 vote. Reaching a final deal is further complicated by recent elections in Finland, where a euro-skeptic anti-bailout party might be part of the new government.

News of an imminent deal "should be treated positively, but Portugal has a formidable adjustment programme ahead as it needs to pursue major structural reforms while achieving radical deficit reduction," analysts at Barclays Capital said.

"Overall, the size of the package signals the determination of the EU authorities to ring-fence problems in the periphery, especially given the elevated market concerns about Greece and subsequent contagion risks that could arise from that," it said.

Market pressures were evident in a Portuguese debt sale Wednesday. The government managed to raise euro1.12 billion ($1.67 billion) in short-term financing, but the interest rate demanded by investors was high. The yield on the 3-month Treasury bills was 4.65 percent _ up from 4.05 percent on the same debt two weeks ago.

Portugal's borrowing costs have hit unsustainable levels, with the yield on its 10-year bonds reaching 9.34 percent, forcing it to ask for a financial rescue package to stave off bankruptcy. Authorities say Portugal won't be able to settle debts due in June.

"Clearly the rate was very high for such a short-term loan, but (Portugal) managed to raise a bit more than it had intended," Filipe Silva, debt manager at Portuguese financial group Banco Carregosa, said. "Now we just have to find out what rate it will pay on the bailout loan."

___

Steinhauser contributed from Brussels.