Apr 8, 2011

Portugal bail-out: EU aims for mid-May completion

Watch: Ollie Rehn says 'we will first have to define the financing gap'
The European Union is aiming to have sorted out a bail-out for Portugal by the middle of May.
It will mean the deal on introducing new austerity measures will have to be made before the 5 June elections.
In an announcement at an EU finance ministers' meeting in Hungary, Commissioner Olli Rehn said they would have to reach cross-party agreement.
He added that he expected the bail-out package to be in the magnitude of 80bn euros ($115bn; £70bn).
He also said that he was confident that Portugal could refinance its own debt until a deal could be completed.
The formal request for financial assistance was made by Portugal at 2200 CET (2000 GMT) on Thursday.
Ambitious programme Commissioner Rehn said that the austerity measures that were defeated in the Portuguese parliament would be a starting-point for the reforms that would need to be made to secure the assistance package.
He also said that there would have to be an "ambitious privatisation programme" to reduce debt.

Analysis

It was the Socialist government's lack of a majority that led to its last austerity package being rejected, and the prime minister's resignation. Parliament has now been dissolved.
So, in order for a bail-out deal to be credible, it must be approved by the centre-right Social Democrats, who currently lead in the polls.
Opposition leader Pedro Passos Coelho said he backed the bailout bid on principle, but that any package should be "minimal".
The party is keen to avoid having its hands tied so far ahead of the 5 June election; ideally, it would like for only part of the deal to be agreed now. But it is doubtful that EU officials and member states would accept that.
In general, the Social Democrats favour spending cuts over tax hikes, though they haven't ruled out a further rise in VAT from the current 23%.
But while privatisations and rises in VAT and other taxes could be on the agenda, ordinary voters might like to see an aid package curb political patronage in state bodies, where appointees from the two main parties are seen by many as benefiting handsomely at the expense of taxpayers.
Jose Socrates' government fell because he could get the measures passed.
The BBC's business editor Robert Peston understands that the bail-out will be made on a similar basis to that of the Irish Republic, one third of which is coming from EU funds which the UK will contribute to, one third from the eurozone and one third from the International Monetary Fund.
Also at the finance ministers' meeting, Spain's finance minister has continued to stress that her country will not need bailing out.
Elena Salgado said that "of course" Portugal would be the last eurozone country that needed a debt bail-out and added that Spain applying for one was out of the question.
An early step in the negotiations on a bail-out will be for the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) to send a joint mission to Portugal.
EU rules require such a mission to be sent to a country asking for financial aid, to establish the details of the help needed.
Portugal's cost of borrowing has risen sharply since the minority socialist government resigned last month after its proposed tougher austerity measures were defeated in parliament.

Start Quote

Young people with talent are leaving Portugal because they can't find jobs where they can progress.”
Jel Writer of Portugal's Eurovision Song Contest entry
Different problems
The ECB said on Thursday that it had encouraged Portugal to seek financial aid.
Portugal's problems have been different from those of Greece and the Irish Republic, the other countries that have needed bailing out.
Weak economic growth and low productivity have meant that the country has struggled to raise enough money through taxation to pay for government spending.
When the banking crisis came, it found itself dealing with the same rising costs of debt that other countries had to deal with, and has finally had to concede that it cannot raise the money it needs through financial markets.
The Republic of Ireland on the other hand, had a much more severe banking crisis, largely as a result of a property bubble that burst.
Greece went on a debt-fuelled spending spree while failing to sort out the public finances to fund it.

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