May 19, 2024

Political Divide Poses Risks for Portugal in Bailout Talks

Political leaders in Lisbon will begin the task of setting aside their domestic differences in order to negotiate acceptable bailout terms with international creditors.

The European Commission, meanwhile, received Portugal’s formal request for aid on Thursday. That should allow finance ministers meeting this weekend to give the go-ahead for Brussels negotiators to head for Lisbon.

Portugal’s Socialist prime minister, José Sócrates, bowed to market pressures on Wednesday night and requested a bailout from the European Commission, joining Greece and Ireland.

The rescue call, however, comes amid a leadership vacuum in Portugal that might not even be resolved by a general election on June 5. Mr. Sócrates resigned last month when center-right opposition lawmakers led by the Social Democratic Party rejected his austerity package.

Politicians from both sides are due to meet in the coming days to hammer out what kind of bailout package Portugal will request. One estimate by a European official put Portugal’s needs at about 75 billion euros ($106.5 billion), but some analysts have suggested that the amount could be as much as 110 billion euros. Last year, Greece secured a rescue package worth 110 billion euros and Ireland 85 billion euros.

But consensus among Portugal’s political leaders will not be easy. While opposition leaders agree that Portugal needs a bailout, policy makers in Lisbon know they will must get all sides to support the austerity measures that will be demanded by the international lenders.

To complicate matters, the negotiations are taking place in the midst of an election campaign that will probably be dominated by the question of who is to blame for Portugal’s predicament. The leader of the main Social Democratic opposition party, Pedro Passos Coelho, supported the decision to seek outside help, but he and Mr. Sócrates are blaming each other for forcing Portugal to seek a bailout in the first place.

“What the election campaign is now about is who should assume the responsibility for inviting international creditors into Portugal,” said Diogo Ortigão Ramos, a specialist on fiscal legislation at a law firm, Cuatrecasas, Gonçalves Pereira.

The cabinet minister in the caretaker government, Pedro Silva Pereira, told Reuters that the government could not yet comment on the size of aid, and the next steps will be defined by the European Commission.

The French finance minister, Christine Lagarde, said European ministers could start discussing conditions for a deal on Friday. “We need to get ready to reply to this request and examine the conditions to which the loan will be subject,” Ms. Lagarde told journalists, a day ahead of a finance meeting in Hungary.

“I am leaving for Budapest tonight and we will start discussing it tomorrow morning,” Ms. Lagarde said, according to Reuters.

If the pattern of previous bailouts is repeated, it could take several weeks for a team of Brussels and perhaps International Monetary Fund officials to discuss the conditions of a bailout with Lisbon, which will ultimately need to be approved by European finance ministers.

Mr. Pereira said Portugal’s caretaker government had asked President Anibal Cavaco Silva to talk to the opposition parties about the aid request. On Thursday, President Cavaco Silva called in a Facebook message for “responsible cooperation” on the part of the opposition parties to help negotiate an acceptable deal.

European officials in Brussels are hoping that all sides in Portugal can reach some agreement on a bailout package and avoid the political volatility that they saw with the last request for a rescue, in Ireland. Leaders in Dublin negotiated an assistance package before an election earlier this year. Now the new Irish government wants to re-open the terms to which its predecessor agreed.

“Everyone wants to avoid a repetition of Ireland,” said one European diplomat speaking on condition of anonymity due to the sensitivity of the subject.

However another diplomat said there were signs that Portuguese politicians had seen the danger and would compromise.

“When your house is on fire, you don’t argue about how to put it out, you call the fire brigade,” the official said.

The most recent opinion polls suggest that neither party will be able to secure a parliamentary majority in June.

Before any financial help can be put in place Portugal faces a rendezvous with the financial markets with a bond redemption of 4.2 billion euros on April 15. European Union finance ministers meeting in Hungary Friday and Saturday expect to hear from their Portuguese counterpart regarding how much of this amount has already been raised.

Some officials say Portugal might need to seek bilateral loans from other nations to tide it over, though others hope that the effect of Wednesday’s announcement will be to drive down the cost of short-term borrowing for Portugal.

Lisbon’s request for aid now puts pressure on Spain, which has undertaken major economic reforms, budget cuts and a banking clean-up to stay out of danger.

Spain, however, held a successful bond auction on Thursday, raising 4.1 billion euros at a yield that was little changed from three months ago. Separately, France also 9.49 billion euros of bonds on Thursday, drawing strong demand.

The Spanish sale “confirms that there are no signs of a contagion spreading to Spain at present,” said Chiara Cremonesi, fixed-income strategist at UniCredit In London. “Spain continues to be perceived by investors as part of the “safer” periphery countries group.”

Portugal’s rescue call came after it was forced on Wednesday to sell Treasury bills at a much higher cost than last month. That followed a series of downgrades by leading credit rating agencies, as well as a warning by the country’s leading banks that they would not buy more Portuguese sovereign debt.

The country could end up with a hung Parliament after the June vote, according to an opinion poll carried out by the Catholic University of Portugal and released Wednesday. Thirty-seven percent of respondents said they would vote for the Social Democrats while 7 percent support its conservative ally, the Popular Party. The Socialists, meanwhile, would win 33 percent of the vote, with other left-wing parties securing the outstanding share of the votes, the poll found.

Raphael Minder reported from Lisbon and Stephen Castle from Brussels.

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