May 24, 2024

Political Disputes Cloud Portuguese Bailout Talk

LISBON — International creditors started discussing the terms of a bailout for Portugal on Tuesday amid concerns that their initial challenge would be to sort out the country’s political disputes rather than its financial situation.

The negotiators will seek to persuade feuding political parties to bury differences that have intensified in the buildup to a general election on June 5, which was called because of a parliamentary standoff over how to clean up the Portuguese government’s finances.

The creditors are expected to negotiate an assistance program for Portugal worth about 80 billion euros, or $116 billion, that is both broader and more stringent than a package of austerity measures that lawmakers rejected last month.

The rejection led to the resignation of Prime Minister José Sócrates, who remains at the helm of a caretaker Socialist government until the general election.

Officials from the European Commission, the European Central Bank and the International Monetary Fund will also want the terms of such a program to be endorsed by Portuguese opposition parties to ensure that a deal remains binding whatever the outcome of the June 5 vote.

Despite the political wrangling in Lisbon, analysts suggested that Portugal could not afford to delay a bailout deal beyond mid-May, the deadline set by European Union finance ministers last week.

“Political divisions are likely to keep weighing on the drafting of the program,” Tullia Bucco, an economist at UniCredit, wrote in a research report. “But the involvement of I.M.F. and E.U. officials should help ease potential tensions and forge a consensus on the needed measures.”

The bailout talks in Lisbon this week are expected to start with a technical assessment of Portugal’s finances, including the accounts of its banking sector.

To add to the uncertainty, the election might not produce a clear-cut outcome. The main opposition Social Democratic Party is expected to win, but without an absolute majority. The most recent opinion poll, released last week and carried out by the Catholic University of Portugal, showed Mr. Sócrates and his Socialist party narrowing the gap — an outcome that raised the possibility of a hung Parliament.

“Nobody looking at Portugal’s economic and political prospects should rule out Sócrates at this stage, because he has certainly not lost as much support as one might expect in this crisis and is at his strongest when campaigning,” said Cristina Casalinho, chief economist of BPI, a Portuguese bank.

Tough conditions set by international creditors could set off more social unrest and raise protectionist sentiment, playing into the hands of far-left politicians, led by the Communists, who arguably remain more powerful in Portugal than anywhere else in Western Europe.

This week, leftist groups started erecting billboards around Lisbon condemning an anticipated demand by creditors for more privatizations, under the slogan that “With the I.M.F., the one who pays is you.”

Portugal is following Greece and Ireland in requiring international assistance. The concern in Portugal is that tough bailout terms will leave the country with crippling repayment obligations that the country cannot count on economic growth to help it meet. The monetary fund projects that Portugal will remain in recession until 2012.

Political feuding in Lisbon has kept Portugal’s debt yields close to record highs since the rescue request last week. The yield on 10-year Portuguese bonds rose one basis point, or one hundredth of a percentage point, to 8.411 percent on Tuesday.

Portugal’s woes are being watched in Spain, a much larger euro zone economy that has also been in investors’ firing line because of its budget deficit and troubled banking sector. Spain’s borrowing terms have improved in recent weeks, however, after the central government met its 2010 deficit target. The yield on 10-year Spanish bonds fell 5 basis points Tuesday to 5.165 percent.

In a further vote of confidence, the Chinese prime minister, Wen Jiabao, said Tuesday that China would continue buying Spanish bonds, after recently buying about 6 billion euros. His comments followed a meeting in Beijing with Prime Minister José Luis Rodríguez Zapatero.

Having resisted for months the idea of a bailout, the Portuguese authorities now insist some of the rescue financing must be delivered by June. The Portuguese Treasury had a cash balance of 3.3 billion euros at the end of March, which it subsequently strengthened by selling some additional debt — although at high interest rates — to meet 4.5 billion euros in repayments due Friday.

Portugal next faces repayment obligations of about 7 billion euros in June, its toughest refinancing hurdle of the year.

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