Political fights could unravel Portugal's bailout

AP News
Posted: Apr 11, 2011 10:11 AM
Political fights could unravel Portugal's bailout

Portugal's massive rescue package was threatened on two sides Monday _ by internal political squabbling and external bailout fatigue among EU neighbors _ and it was not clear whether the proposed deal would last.

A delegation from the International Monetary Fund, European Central Bank and European Commission _ bodies that will raise the estimated euro80 billion ($115.5 billion) bailout for Portugal and oversee its use _ is expected in Lisbon on Tuesday for initial talks.

European finance ministers agreed Friday to put up the money Portugal needs, making it the third country in the 17-nation eurozone to accept a huge financial lifeline.

But a domestic political spat about the scope and terms of the bailout package threaten to slow negotiations and prolong Portugal's plight just as it needs to honor debt repayments amounting to more than euro11 billion ($15.9 billion) over the next three months.

"It's not exactly what you'd want when you're in the middle of a disaster of this kind," Vanessa Rossi, an economic analyst at the London think-tank Chatham House, said Monday of the squabbling.

"I'm not sure what they're going to do in the next few weeks if they can't get a deal," Rossi said. "It could just mean that the whole of the financial sector and the government freeze up."

The political feuding is likely to vex European officials who want unanimous political commitment in return for a big loan.

European financial officials are already frustrated with Athens as the Greek government slips behind targets set as part of its euro110 billion ($159 billion) bailout last year, and are arguing with Ireland's new government, which is demanding better interest rates on its own euro67.5 billion ($97.4 billion)rescue package.

The patience of voters in wealthier European countries, whose taxes are funding the bailouts, is also wearing thin.

"It's a difficult proposition to sell (to voters), that's why the terms of the (Portugal) bailout will probably be particularly harsh," said Diego Iscaro, an analyst at IHS Global Insight.

Portugal has to come up with euro4.5 billion ($6.5 billion) for a bond repayment on Friday, then it needs around euro7 billion ($10 billion) to repay other debts in June. But it is struggling to raise funds as markets back away from investing in a country plagued by financial difficulties.

EU Monetary Affairs Commissioner Olli Rehn, who hopes a formal bailout deal can be signed by the middle of May, last week urged Portugal's political parties to "realize their major responsibility of overcoming the current difficulties."

The main parties, however, aren't even on speaking terms, and are in a confrontational mood ahead of an early election on June 5.

A rescue package entails surrendering control to foreigners over key aspects of national financial affairs. Portuguese politicians fear they could be punished at the ballot box if they give their blessing to measures that lower living standards in what is already one of western Europe's poorest countries.

The Socialist government quit in anger last month after opposition parties rejected its latest austerity measures, including new tax hikes and pension cuts, that were devised to avoid asking for a bailout.

The main opposition Social Democratic Party, which is ahead in opinion polls, has accused the government of economic mismanagement.

Another concern is increasing social unrest. Austerity measures enacted so far have spawned numerous strikes and street protests, and a bailout program is likely to produce more. The Portuguese Communist Party and the Left Bloc party, who blame bankers and financiers for the crisis, have formed an alliance to fight more belt-tightening. Together, they could snare close to 20 percent of the vote.

The outgoing government, now in a caretaker role, says the Social Democrats are to blame for the bailout. Interim Prime Minister Jose Socrates says he will keep opposition parties informed about the bailout negotiations, but stopped short of saying he would accept their advice.

The Social Democrats, meanwhile, are holding out for a deal that would provide a bridge loan until the June 5 ballot, with the new government then negotiating a full package.

But European leaders _ eager to clear up the Portuguese mess quickly before it spreads to other debt-troubled countries such as Spain, Italy and Belgium _ are unwilling to back any bridge loans.

Voters in Germany, the continent's strongest economy, are unhappy about running to the aid of successive countries. German Economy Minister Rainer Bruederle says there needs to be a "tough adjustment program to restore Portugal's competitiveness" and a "strict plan" to cure its budget woes.

The True Finns, a small populist party expected to do well in Finland's national election Sunday, has balked at more bailouts.

The mounting pressure will likely force Portuguese politicians to back down, according to Iscaro at IHS Global Insight.

"Given the state the economy's in, I expect something's going to have to give," he said.


Matti Huuhtanen in Helsinki and Geir Moulson in Berlin contributed to this report.