Tags: Portugal | Leaders | Weigh | Bailout | Terms | Crisis

Portugal's Leaders Weigh Bailout Terms Amid Crisis

Wednesday, 13 April 2011 12:39 PM EDT

Portugal's political leaders began discussing Wednesday what price they are willing to pay for a huge international loan, mindful of the continuing plight of Greece and Ireland after their bailouts last year.

Portugal's European partners and the International Monetary Fund agreed last week to grant the heavily indebted eurozone nation a big cash loan to prevent its imminent financial collapse. The assistance could amount to 80 billion euros ($116 billion).

But the money will come at a cost. The country will have to pay an interest rate for it and enact austerity measures that could choke growth and trigger a public outcry ahead of a June election.

Ireland is seeking a lower interest rate on the aid it accepted last year, after Greece was rewarded with a modest reduction to ease the repayment burden. Both countries are still struggling economically.

The Portuguese are keen to avoid that fate, and political parties huddled at the prime minister's official Sao Bento residence to discuss strategy in the bailout negotiations, which all sides want to complete by mid-May.

Simon Tilford, chief economist at the Centre for European Reform think-tank in London, said "previous bailouts have solved nothing" and Portugal "is right to bargain hard" because similar rates to those imposed on Athens and Dublin could be self-defeating.

"There's a risk that unless loans are extended at a serviceable interest rate, all the bailout would do would make things worse," he said.

European governments fear the three ailing eurozone members may need to restructure their debt — a move that would alarm investors who are expecting their loans to be repaid on previously agreed dates.

Restructuring could be felt far and wide if investors lose confidence in the single currency bloc's fiscal soundness.

Tilford said that underlying worry puts Portuguese authorities in a stronger bargaining position as they assess the bailout terms on offer.

A delegation from the IMF, European Central Bank and European Commission started inspecting Portugal's books Monday to determine how much the country needs. Officials are due to begin direct negotiations next week about the scope and conditions of the loan, which is expected to be for three years.

Portugal, one of western Europe's poorest countries, is in dire straits and its financial needs are pressing. Officials say the country will run out of money to meet its obligations by June, when it needs to come up with debt repayments totaling around 7 billion euros.

Portugal may need the cash before a new government takes office in mid-June. That has led to demands from international creditors for a broad agreement between the squabbling political parties so that the conditions are met no matter who wins the ballot.

European Commission President Jose Manuel Barroso said Wednesday the bloc's rules don't allow for a bridge loan which would postpone a final deal until after the election.

"We're doing everything we can to conclude this (bailout) program in time so that we can deliver a first installment that will guarantee Portugal's financing requirements," Barroso said in Brussels, adding that Portugal's situation is "delicate and extremely urgent."

Portugal's problems are different from those of Greece, where true debt levels were obscured, and Ireland, which was engulfed by the collapse of its banking system.

Portugal's difficulties have mounted over the past decade as it deferred economic changes that might have generated wealth. Its growth rates lagged others in the eurozone at below 1 percent a year.

It spent money it didn't have by taking loans, leaving the country mired in public, private and corporate debt and scaring away investors.

Its current difficulties are not being helped by the IMF's projection that the economy will remain in recession through 2012.

Paulo Pinho, an economics lecturer at Lisbon's New University, said any bailout agreement would need to avoid punitive borrowing costs that would compound the fragile country's problems.

"We run the risk of killing the patient with the cure," Pinho said.

Portugal is currently being run by a caretaker government after the previous administration quit last month in a dispute over austerity measures. The ensuing political uncertainty ahead of the June ballot is further complicating the bailout discussions.

Interim Prime Minister Jose Socrates, whose center-left Socialist Party has governed for the past six years, summoned opposition leaders to discuss the bailout.

Pedro Passos Coelho, the leader of the main opposition Social Democratic party, which leads opinion polls, said after meeting Socrates he would not block the bailout agreement being negotiated by the caretaker government.

However, he insisted that any deal would have to lower the country's borrowing costs — the current yield on its 10-year bonds is an intolerable 8.75 percent — and set out policy changes designed to fuel growth.

Passos Coelho also demanded a bigger reduction in state spending and fewer cuts in pay and welfare "to avoid social breakdown" amid mounting strikes and street protests. He was a chief critic of the outgoing government's yearlong series of tax hikes and pay and pension cuts.

Pinho, the economics lecturer, said Portugal needed a broad coalition government made up of different parties to ensure policies are enacted, as it had when the IMF last rescued Portugal in 1983-84.

"If the election campaign ... becomes acrimonious it'll make a post-election agreement very hard — but it's indispensable," he said.

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Portugal's political leaders began discussing Wednesday what price they are willing to pay for a huge international loan, mindful of the continuing plight of Greece and Ireland after their bailouts last year. Portugal's European partners and the International Monetary Fund...
Wednesday, 13 April 2011 12:39 PM
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