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March 29, 2023

Harsh cuts ahead as Portugal accepts inevitable bail-out

Most Germans in favour of EU’s multi-billion-euro aid.

With the inevitability of a house of cards collapsing in a slight breeze, Portugal has become the third country in the Eurozone to apply for a bail-out from the European Union (EU) and the International Monetary Fund (IMF). The full details of the deal will be finalised by mid-May and the UK is expected to bear up to £6 billion of the costs. Experts from the European Commission, European Central Bank and IMF will visit Lisbon on Tuesday, WSJ informs.

At the end of a fraught week, the two bodies agreed to fund a rescue package thought to be in the region of EUR 80 bln to prevent the troubled EU member going into economic freefall. In return, Portugal’s caretaker government will be forced to accept a package of stringent reforms in a belated attempt to put its economy in order. “The bailout will likely require a three-year program, Olli Rehn, European Union commissioner for monetary affairs said at a news conference on the sidelines of a meeting of European finance ministers in Godollo, Hungary. Klaus Regling, head of the European Financial Stability Facility, the EU’s rescue mechanism, told reporters that the EFSF can react within 10 days of a final agreement on a rescue package. He also expressed confidence that Portugal’s problems won’t spread to Spain, saying that investors understand the difference between the two nations’ fiscal situation. The risk “of contagion is much less than six or nine months ago,” he said.

According to Luxembourg’s hawkish Prime Minister Jean-Claude Juncker: “Financial support will be provided on the basis that a policy programme will be supported by strict conditionality negotiated with the Portuguese authorities, duly involving the main political parties.” The main problem is that the debt has been revealed as being larger than expected. Many public building works have run out of money, workers have been laid off and public-private partnership projects have been running out of control and amassing enormous debts. Against a background of persistently weak growth and a long history of large budget deficits, Portugal was simply unable to cope when it got into financial difficulties earlier this year. One example says it all: in the past year the government allowed public debt to soar to more than 90 pc of gross domestic product.

The Emnid poll for the Bild am Sonntag weekly showed 50 percent agreed with the European Union’s decision to bail out debt-wracked Portugal. According to the survey, 45 percent believed it was the wrong decision.

Chancellor George Osborne flies to Washington this week with a tough message for the crisis-hit eurozone – after Portugal, you’re on your own. “He will tell fellow European finance ministers that Britain will not participate in any future Brussels-organised fund for rescuing debt-ridden members of the single currency,” said a Treasury source for Daily Mail. And the Chancellor is expected to burnish his image as one of the world’s top deficit hawks, urging developed countries, including the US, to act decisively to drain the red ink from their public finances.

ECB blamed for portugal aid request

A senior Portuguese banker has said that the European Central Bank (ECB) pressed the country’s lenders to stop increasing their use of its liquidity – setting in train events that led Lisbon to ask for a bail-out last week, Financial Times informs, quoted by Mediafax. Antonio de Sousa, head of the Portuguese Banking Association, said that the message from the ECB and Portugal’s central bank not to expand their exposure to ECB funding further came a month ago. The main reason for the banks’ heightened exposure was linked to their financing of public sector and government debt, he said, and the instruction led them to conclude they could not increase their exposure to state debt. Jean-Claude Trichet, president of the ECB, fiercely denied that it had pushed Portugal into accepting outside help. “We didn’t force the banks to do anything. We didn’t force the government or the authorities in general . . . to do anything,” he said. The ECB has also urged banks in other eurozone countries to reduce their reliance on its liquidity – without intending to influence how they invest their funds.

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