Portugal seeks bailout amid political crisis

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Portugal's caretaker government said yesterday (6 April) it had decided to seek financing from the European Union, in an abrupt turnaround after resisting a bailout for months despite sharply deteriorating financial conditions.

The nation of 10.5 million became the third member of the euro zone to seek a rescue after Greece and Ireland after months of fending off market pressure to request assistance, as borrowing costs soared amid deepening political instability.

Portuguese Prime Minister José Socrates said in a televised statement that parliament's rejection of additional austerity measures last month had aggravated the financial situation, ultimately making the request for aid "inevitable".

"I tried everything, but in conscience we have reached a moment when not taking this decision would imply risks that the country should not take," he said.

Socrates cited no figure but a eurozone official estimated Lisbon is likely to need between €60 and 80 billion in European and International Monetary Fund loans over three years. Any assistance will be subject to strict conditionality.

The IMF said it had not received a request from Portugal for financial assistance but it stood ready to help. EU paymaster Germany insists on IMF involvement as a condition for bailouts.

European Commission President José Manuel Barroso said on Wednesday that Portugal's request for aid would be dealt with as quickly as possible.

In a statement, he said he had assured Prime Minister Socrates that Lisbon's request for activation of financial support mechanisms "will be processed in the swiftest possible manner, according to the rules applicable".

Barroso also reaffirmed his "confidence in Portugal's capacity to overcome the present difficulties, with the solidarity of its partners".

Conditions still to be decided

A formal request still needs to be made but as soon as Portugal sends it, the Commission said it will dispatch a mission to Lisbon to determine the details of the programme, such as the interest rates and the conditions attached to the aid package.

EU finance ministers will meet in Gödöll?, Hungary, on Friday and Saturday (8-9 April) to discuss the package.

Portugal's position worsened when the minority Socialist government resigned on 23 March after the parliamentary defeat, casting the country into political limbo. An early general election is set for 5 June (see 'Background').

Bond yields spiked, ratings agencies downgraded sovereign and bank debt, and local banks warned this week they may no longer be able to buy government paper.

"In this difficult situation, which could have been avoided, I understand that it is necessary to resort to the financing mechanisms available within the European framework," Finance Minister Fernando Teixeira dos Santos said.

Experts say Portugal's negotiations for a loan from the European Union and International Monetary Fund could be more difficult than those of Greece and Ireland.

The Socialist caretaker government has said it has limited powers and parliament, which EU officials say would normally have to ratify any agreement before disbursal, is dissolved until the election.

The head of the centre-right Social Democrats, the main opposition party, said he supported the request for aid. But the party, in rejecting an austerity plan by the government last month, helped spark the crisis that led to it.

(EURACTIV with Reuters.)

Fernando Ulrich, the head of the country's third biggest private bank - Banco BPI - said the decision to ask for help was a "big step", news agency Lusa reported.

Tullia Bucco, an economist at Unicredit, said EU finance ministers would consider Portugal's request "in the difficult political environment" at a meeting on 8-9 April in Budapest.

"It's a timely reminder of the trouble the southern economies of Europe are currently experiencing with high costs of debt, but with the northern economies continuing to grow strongly, the ECB's commitment to fighting inflation may be the main driver of its decision-making," said Jonathan Sudaria, a dealer at Capital Spreads.

Portuguese Prime Minister José Socrates resigned on 23 March and warned of grave consequences for the country after parliament rejected his government's latest austerity measures aimed at avoiding a bailout.

Portugal's President Aníbal Cavaco Silva dissolved parliament on 31 March and set a snap general election for 5 June, warning that the next government faced an "unprecedented economic crisis".

After Greece and Ireland received EU-IMF bailouts last year to cope with their swollen public debts and deficits, Portugal was seen as the next candidate for a rescue despite efforts to put its public finances in order. Spain may follow after that.

The EU has discussed a rescue plan for Portugal but it is dependent on Lisbon asking for the aid and making an official request to both the EU and the International Monetary Fund.

  • 8-9 April: EU finance ministers meet in Gödöll?, Hungary, to discuss the aid package to Portugal.
  • 16 May: Eurogroup meeting.
  • 17 May: Meeting of EU finance ministers.
  • 5 June: Portugal holds early general election.
  • 20 June: Eurogroup and EU finance ministers meeting.
  • 24 June: Next meeting of EU heads of states and governments in Brussels.

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