December 3, 2023

Bailout for Portugal Will Put Politicians in a Vise

LISBON — To secure a bailout worth about €80 billion, Portugal may have to agree to international creditors’ demands that it impose tougher austerity measures than those its own lawmakers rejected less than a month ago.

This paradoxical situation is fueling divisions in Lisbon before a June 5 general election that was itself called because of a parliamentary standoff over how to clean up the public finances. In fact, Portuguese politicians may be more concerned about not getting blamed by voters for seeking outside help than about negotiating favorable terms for that rescue, valued at $116 billion.

“For the first time in three generations, the Portuguese are being forced to accept that they may find themselves worse off than their parents, and that is a huge shock for which nobody wants to take the blame,” said Miguel Morgado, a political science professor at the Catholic University of Portugal.

But officials from the European Union, the International Monetary Fund and the European Central Bank — expected to arrive Tuesday in Lisbon — will want to ensure that bailout conditions remain binding whatever the outcome of the June 5 vote. With that in mind, Olli Rehn, the European commissioner in charge of economic and monetary affairs, said last week that “a cross-party agreement” needed to be negotiated by mid-May, led by the caretaker Socialist government of Prime Minister José Sócrates but also involving opposition parties.

So far, the Portuguese response has been discordant.

Fernando Teixeira dos Santos, Portugal’s finance minister, said that “it is not for the government to negotiate with the opposition.”

Pedro Passos Coelho, the head of the main opposition Social Democratic Party, who will challenge Mr. Sócrates in June and is leading in opinion polls, backed the government’s call for a rescue, but called for any bailout package to be “minimal.”

International creditors will also be met in Lisbon with deep suspicion that a bailout, while necessary to meet Portugal’s immediate refinancing obligations, might not guarantee longer-term financial security. That fear has been fueled by the examples of Greece and Ireland, whose financing situation remains precarious even after securing last year €110 billion and €85 billion, respectively, in assistance.

“The chances of Greece not having to restructure its debt are not much higher than a year ago and that is something that our negotiators must keep in mind when discussing what interest rates are appropriate,” said António Nogueira Leite, a senior economic adviser to the Social Democratic Party.

While Portugal will be negotiating its rescue from a position of weakness, its European partners should also realize that “if the burden is not shared fairly in this third bailout, there is a genuine risk that resentment will poison the whole European project,” said Rui Ramos, a political analyst and professor of political history at the University of Lisbon.

“Germany and others must recognize that the problems of Southern European countries like Portugal are also due to excessive lending by their own banks,” he added.

When Portugal last called upon international assistance, in 1983, it was able to couple I.M.F. aid with a currency devaluation that resulted in an export-led recovery. That is no longer an option since the country adopted the euro.

In fact, the bailout negotiations come as Portugal faces another recession, with its central bank forecasting that the economy will contract 1.3 percent this year. Its public debt is expected to rise to almost 100 percent of gross domestic product this year from 60 percent five years ago.

Furthermore, Portugal recently revised its 2010 budget deficit — to 8.6 percent of G.D.P., rather than 7.3 percent — under stricter guidelines from Brussels about accounting at state-owned companies.

Some economists say they worry that Portugal’s difficulties will be harder to address than those of Greece or Ireland, where specific errors precipitated the crisis. Greece admitted to misstating public accounts while the Irish government guaranteed the debts of the country’s banks, which took huge write-downs on real estate loans.

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