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Portugal Pressured to Seek Aid From EU, IMF

Sunday, 09 Jan 2011 12:22 PM

Pressure is growing on Portugal from Germany, France and other eurozone countries to seek financial help from the EU and IMF to stop the bloc's debt crisis from spreading, a senior eurozone source said on Sunday.

Some preliminary discussions on the possibility of Portugal asking for help if its financing costs on markets become too high have taken place since July, the source said.

No formal talks on aid have started yet, a number of eurozone sources said, but the pressure was rising in the Eurogroup, which brings together eurozone finance ministers.

"France and Germany have indicated in the context of the Eurogroup that Portugal should apply for help sooner rather than later," the senior source said, adding that Finland and the Netherlands had expressed similar views.

Earlier on Sunday a Portuguese government spokesman denied a German magazine report that Lisbon was under pressure from Berlin and Paris to seek a bailout from the European Union and International Monetary Fund.

Many policymakers hope EU/IMF financing for Portugal would ring fence the eurozone debt crisis, in which Greece and Ireland have already taken bailouts.

Help for Lisbon would aim to protect Spain which might be next in line, but whose financing needs would stretch current eurozone aid capabilities to the limit.

"The real battle will be the battle of Spain — but there I think we have much higher chances of success," the source said.

Asked to estimate the possible size of a program Portugal could need, the source said:

"More than 50 billion euros ($64.42 billion) and less than 100 billion euros ($128.85 billion), say between 60 and 80 billion, but this is off the cuff, because we don't know the needs of the Portuguese banking sector."

Portugal is viewed by many economists as the peripheral eurozone country that is most likely to follow Ireland and Greece as it grapples to cut its debts and borrowing costs.

"Portugal has not requested it — you cannot force somebody to want something," a second senior eurozone source said. "Strictly arithmetically speaking, it would not be necessary, but given the hysterics of some market participants it may become useful."

Pressure on Lisbon to ask for aid has grown since yields on Portuguese paper rose last week to levels that many see as unsustainable, the first source said.

There had already been pressure on Lisbon to ask for financial help before an EU leaders' summit in mid-December, but to no effect, the first source said, because Portuguese Prime Minister Jose Socrates opposes such a move.

"There are still memories in Portugal of the IMF program of the seventies, and the loss of sovereignty that it entails," the source said.

Asked when Portugal could be forced to turn to the EU and the IMF for help, the first source said this depended on yield developments, the position of Socrates and how much pressure German Chancellor Angela Merkel and French President Nicolas Sarkozy were willing to apply.

Portugal holds its first bond auction of the year next week, offering up to 1.25 billion euros' worth of paper maturing in October 2014 and June 2020.

"That auction will be very closely watched," the first source said. The yield of five-year Portuguese bonds on the secondary market is 6.43 percent and 10-year paper trades at 7.26 percent.

The five-year paper is already above the cost of funding that Portugal would get under EU/IMF aid, the source said.

"They had a difficult week on the markets," a third eurozone source said, referring to the surge in yields on Portuguese T-bills at a primary auction last week and secondary market developments.

"The question is if they can raise what they need in the first half of the year with issuance at the longer end of the curve. Given the busy calendar in the first quarter it is a challenge," the third source said.

The first source also noted that Lisbon already had a head start with reforms that could form part of a potential aid program, should the Portuguese government apply for it.

Portugal's recent austerity reforms, that have been part of the tough 2011 budget, have already been worked on in cooperation with the European Commission — "like an aid program but without the financing," the source said.

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