Portugal starts bailout talks; deal seen

Reuters News
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Posted: Apr 12, 2011 10:49 AM
Portugal starts bailout talks; deal seen

By Sergio Goncalves

LISBON (Reuters) - Portugal launched talks on Tuesday with European authorities and the IMF on a bailout the caretaker government said it needs to pay the country's dues from June, as politicians jostled ahead of a general election.

Officials from the European Commission, European Central Bank and IMF will pore over Portugal's public accounts to decide on extra austerity measures they deem necessary for Lisbon to reduce its budget deficit in return for a three-year loan that could reach 80 billion euros ($115.7 billion).

Finance Minister Fernando Teixeira dos Santos acknowledged Lisbon only had its financing needs covered for this month and next, but will need the bailout loans from June onwards.

"We are covered until June. But in June we will be needing the activation of this program," Teixeira dos Santos told Reuters in an interview, saying he expected Europe to approve the aid program in mid-May.

The country has to pay off 4.9 billion euros in maturing bonds in June.

Portugal's crisis entered a critical phase when its minority Socialist government resigned last month after parliament rejected its latest austerity plan. That led to multiple downgrades of its credit ratings and a sharp rise in borrowing rates, making it prohibitively expensive for the country to continue borrowing in debt markets.

Adding to the problems that drove Portugal to seek aid and worsening an already gloomy economic outlook, its consumer price index rose a higher-than-expected 1.6 percent on the month in March, with the year-on-rise reaching 4 percent.

Austerity measures already implemented and further steps likely to be imposed as part of the bailout deal are expected to depress consumer demand and cause a second economic contraction in just two years in Portugal, with 2012 also looking grim, analysts say.

At the heart of the country's woes are a chronic lack of competitiveness since it adopted the euro more than a decade ago -- which means it cannot help its exporters by devaluing its currency. Teixeira dos Santos also pointed to the need to use some of the aid to support its struggling banks.

Newspapers splashed the bailout talks across their Tuesday editions, with many drawing comparisons with the last time the country was under IMF tutelage in the early 1980s, which brought harsh austerity.

"IMF forecasts Portugal will be the only country facing crisis in 2012," said daily Diario de Noticias in its headline. The IMF expects Portugal's economy to contract 1.5 percent this year and 0.5 percent in 2012.

The premium investors charge Lisbon to borrow over 10-years compared to Germany were slightly higher at 546 basis point on Tuesday from around 539 bps on Monday.

CARETAKER

Economists had seen a bailout for Portugal, following on from Greece and Ireland, as inevitable. But the government only caved in -- after months of resistance to foreign aid -- when it failed to get its latest measures through parliament.

The negotiations now will be complicated by the fact that a snap general election is scheduled for June 5 and all parties want to avoid blame for the bailout.

The Socialist government will rule in a caretaker capacity until then. It has said it does not have full powers to agree on a bailout, meaning the opposition Social Democrats, who lead in opinion polls, would be involved in the talks. The policy negotiations of the bailout will start next Monday.

Analysts say they think politicians will ultimately come together and agree basic terms of a bailout.

Although the bickering continued on Tuesday, Teixeira dos Santos called for a commitment by all political forces to the bailout plan, and a senior Socialist figure played down mutual attacks as a "clarification of positions" and called for a compromise.

"It is true that we now have to get into a phase of finding solutions ... the necessity of obtaining at least minimum consensus between the political parties," said Francisco Assis, leader of Socialists in the now dissolved parliament.

The rescue package is likely to set the same budget deficit targets the government committed to previously -- a cut to 4.6 percent of gross domestic product this year, 3 percent in 2012 and 2 percent in 2013. Last year's deficit of 8.6 percent overshot a target of 7.3 percent.

The main political parties have already said they are committed to those targets, while bailout-linked adjustments this year will probably entail harsher spending cuts than in the original government's plan, analysts say.

(Additional reporting by Andrei Khalip and Shrikesh Laxmidas; editing by Patrick Graham)