Portugal 'needs £70bn bailout'

Sunday 23 October 2011 08:31

Preliminary estimates show Portugal will need rescue loans of around €80bn (£70 billion), the EU's Monetary Affairs Commissioner has said.

Olli Rehn added that talks over a strict reforms programme will start immediately with all major political parties, and he hoped a final deal will be in place by mid-May.

He said that the difficult political situation in Portugal - where a caretaker government is in charge until elections in June - makes it essential to reach a cross-party agreement.

Mr Rehn said the programme will include structural reforms, spending cuts, a stabilisation programme for the country's financial sector and ambitious privatisation plans.

Mr Rehn said the 80 billion euro loan for Portugal was based on "very, very preliminary estimates" and that nailing down a final amount will require "weeks of empirical work".

Portugal this week became the third country in the eurozone to request international help, after last year's multibillion-euro rescue packages for Greece and Ireland from the European Union and the International Monetary Fund.

While a rescue of Portugal had long been anticipated and its cash needs can easily be met by Europe's existing financial backstops, the country's political situation - where a caretaker government is in charge until elections in early June - makes reaching a final deal more difficult.

Prime minister Jose Socrates resigned late last month after opposition parties rejected unpopular spending cuts and tax increases that the government said were necessary to get the country's struggling economy back on track.

EU finance ministers, who are in Hungary for a two-day meeting, said that the economic adjustment programme that accompanies the rescue loans will have to go beyond the measures rejected by the opposition, heralding difficult negotiations ahead.

Mr Rehn said it is "essential" that a cross-party agreement is reached in Portugal and added that experts from the European Commission, the European Central Bank and IMF will travel to Lisbon soon to take a close look at the country's books.

Any programme will be based on strict conditions to ensure that Portugal will eventually be strong enough to repay its creditors and will most likely last for three years, Mr Rehn said.

It will require not only cuts in government spending, but also reform measures designed to make Portugal's economy more competitive, Jean Claude Juncker, the prime minister of Luxembourg and the main spokesman for the euro countries, said.

On top of that, the loans will most likely include a "special allocation" to shore up Portugal's banks, Mr Rehn said. Portugal's banks have lent heavily to households and businesses and have relied on ECB emergency funding for months.

European officials hope that aid for Portugal will finally draw a line under the debt crisis that has crippled the continent for more than a year.

"The predominant view in markets is that this step ring-fences the three weaker economies of the euro area and therefore helps to avoid wider contagion," said Klaus Regling, who manages the European Financial Stability Facility, the eurozone's main bailout fund.

He said larger countries like Spain will not be drawn into the crisis now, because financial markets have a better understanding of "the economic fundamentals in the different member states of the euro area".

"The risk of contagion is much less than six or nine months ago," Mr Regling added.

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