Portugal has reached an agreement with the European Union and the International Monetary Fund (IMF) on a EUR 78 bln (USD 116 bln) financial rescue package, becoming the third eurozone country to be bailed out of a sovereign debt crisis. According to BBC News, Prime Minister Jose Socrates said in a televised statement, the three-year loan, including financial support for Portugal’s banking system, was a “good agreement that defends Portugal”. Socrates also said the deal was demanding, but indicated that the terms were not as tough as those agreed with Greece and Ireland. The interest rate to be charged was not specified. Officials from the European Commission, European Central Bank and IMF have been working on a deal for three weeks. Socrates said that Portugal would be given more time to reach its budget deficit targets than had previously been expected. The deficit will have to be cut to 5.9 pc of GDP this year, 4.5 pc in 2012 and 3 pc in 2013.
Portugal had previously aimed to reduce the deficit to 4.6 pc this year, 3 pc in 2012 and 2 pc in 2013. “I would like to announce to the Portuguese people that the government has reached agreement today (our note Tuesday) with the representatives of international institutions on the programme of financial aid to our country,” he said. Socrates resigned as prime minister after failing to get austerity measures through parliament. There will be a general election on 5 June. The deal has to be endorsed by the main opposition parties. The deadline for the bail-out money to be in place is 15 June, when Portugal has to repay nearly EUR 5 bln of debt. Portugal was the third eurozone country to have to ask for a bail-out, after Greece and Ireland. Its economy is expected to contract this year as a result of the latest set of austerity measures. According to WSJ, euro appears to have fallen mildly against a number of its currency rivals Tuesday after the EU and IMF announced their expected plans for a bailout of Portugal. As a result, the EUR/USD came off its recent 17-month high of 1.4900 to trade moderately lower, near the 1.4820 mark at yesterday’s Asian market open.
There are still hurdles to be overcome for Portugal’s bail-out deal. Analysts say there are fears that Greece’s rescue is unravelling and that the Portuguese bail-out will not be the eurozone’s last. “Just at the time that Portugal hopes loans from the EU and IMF will be enough to tide it over, investors are increasingly of the view that a similar rescue of Greece hasn’t worked and that Greece will have to write off portions of its huge government borrowings,” he says. The great fear in the eurozone is that Portugal’s bigger neighbour Spain will also need bailing out, which the EU may not be able to afford. There are also challenges to Portugal’s bail-out coming from Finland, where the bail-out has become a big issue in the formation of a new coalition government, following last month’s elections.
EU rules require all member states to approve, or at least not oppose, bail-outs. Prime Minister-elect Jyrki Katainen has said he will not be able to begin official talks on forming a government until 18 May, which is too late for Finland to be able to vote at the EU finance ministers meeting in Brussels on 16 May that would have to approve the bail-out package. Katainen said he might have to ask parliament to vote on whether to endorse the deal before a government is formed, which might pose difficulties because there was much support in the elections for parties that oppose bail-outs.