September 30, 2023

European Union Sees Bailout Deal for Portugal by Mid-May

After a meeting in Godollo, Hungary, ministers from the 17-nation euro zone said they hope to reach a cross-party agreement in Lisbon on a new austerity plan for the country as part of the bailout, equal to about $115 billion.

Following a crisis which led to the fall of the government, Portugal finds itself with a political vacuum and is led by a lame-duck administration ahead of elections on June 5.

After refusing for months to countenance the idea of an international rescue, the country’s caretaker Prime Minister José Sócrates sent a formal request for help to Brussels on Thursday.

Officials from the European Commission, which is the executive of the European Union, as well as officials from the European Central Bank and the International Monetary fund will assess the financing gap in Portugal and make proposals. They are certain to include additional, far-reaching cuts as well as “an ambitious privatization program,” Olli Rehn, the European Commissioner for Economic and Monetary Affairs, said at a news conference.

Mr. Rehn said that he was “confident that Portugal will match its refinancing needs in April and May, while June will be more challenging.”

For that reason he hoped to have agreement on the new bailout package in time for E.U. finance ministers to consider it at their next regular meeting, on May 16.

The starting point will be the austerity measures on which Mr. Socrates failed to secure an agreement in the Portuguese Parliament before he was forced to ask for a bailout. “It is essential that we will also talk with the parties of opposition,” Mr. Rehn added.

Prime Minister Jean-Claude Juncker of Luxembourg, who chairs the group of euro-zone finance ministers, said there were assurances from the caretaker government and the main opposition party that they remain committed to agreed deficit reduction targets. These would cut the Portuguese budget deficit — which hit 8.6 percent of gross domestic product last year — to 4.6 percent in 2011, 3 percent in 2012 and 2 percent in 2013.

While Mr. Rehn said that the total finance that will be made available by the E.U. and the I.M.F. would be “in the magnitude of around €80 billion,” he said it was too early to specify how much of that would be set aside for repairing Portugual’s financial sector.

If confirmed at €80 billion, the aid would be smaller on a per capita basis than the total size of similar packages negotiated with Ireland and Greece.

Klaus Regling, who heads the eurozone’s €440 billion rescue fund, the European Financial Stability Facility, said that the Portuguese bailout request had helped to reduce the risk of contagion to other countries, most notably Spain, by ring-fencing the euro’s three weaker economies.

“In general the markets today understand much better the economic fundamentals in the different member states in the euro area and that is the reason why the risk of contagion is much less than six or nine months ago,” he said at the news conference with Mr. Rehn.

The Dutch finance minister Jan Kees de Jager said at the meeting that the assistance for Portugal would represent the last bailout in the region. “The other countries are on the safe side,” he said, according to Bloomberg News.

News of the bailout this week helped Portuguese banking stocks, but has done nothing to lower Portugal’s borrowing costs. Yields on Portuguese bonds pushed higher, with the benchmark 10-year yield up 5 basis points at 8.43 percent on Friday, although yields on equivalent German bonds rose by a similar amount.

The euro pushed higher Friday. It was quoted at $1.4435 in late London trading, from $1.4308 late Thursday. The currency has benefited from the European Central Bank’s decision Thursday to lift interest rates in the region.

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