Portugal bail-out terms discussed by finance ministers

The bail-out deal is likely to include major cost-cutting

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The European Union will discuss the size and terms of Portugal's bail-out on Friday after receiving a formal request for aid late on Thursday.

EU finance ministers at a two-day summit in Budapest are likely to consider the scope of a potential deal.

But there is doubt about whether Portugal's caretaker government can agree to the austerity measures that would be a prerequisite for the loans.

Jose Socrates' government fell because he could not pass austerity measures.

The European Commission was clear on Wednesday that it would discuss a deal with the current Portuguese authorities, stressing that with the Irish Republic's bail-out it had spoken to opposition parties, business leaders and trade unions before agreeing to loans.

The Irish Republic's bail-out took six weeks to negotiate, a time period that would take Portugal close to its scheduled elections on 5 June.

Joint mission

The next 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.

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The basic laws of economics are threatening to pull the eurozone apart, just as politicians are trying to pull it together. As usual, the ECB is stuck in the middle of the mess, and it doesn't like it one bit. ”

Stephanie FlandersEconomics editor, BBC News

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• Will the rate rise damage growth?

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.

The ECB said on Thursday that it had encouraged Portugal to seek financial aid.

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Earlier this week Portugal's PM Jose Socrates said "there was too much at risk" for the country not to seek help

Portugal's problems have been different from those of Greece and the Irish Republic, the other countries that have needed bailing out.

Low economic growth and high wages 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.