Officials say bailout to be worth $115 billion over 3-year period
LISBON, Portugal (AP) ― Hard-up Portugal has negotiated an international bailout worth 78 billion euro ($115 billion) over a three-year period, officials said Tuesday.
A government official, speaking on departmental rules of anonymity, told the Associated Press the amount includes aid for Portugal’s cash-strapped banks. The official did not provide further details.
Portugal’s interim prime minister announced the financial rescue package for his ailing country will run through 2013.
Portugal is the third member of the 17-nation eurozone, after Greece and Ireland, to take a bailout due to crippling debts after its economy and financial plans went awry. One of western Europe’s poorest countries, Portugal has said it will run out of money next month.
Prime Minister Jose Socrates, who quit last month but is still running the country ahead of a June 5 election, said Portugal won a favorable agreement after more than two weeks of negotiations with the International Monetary Fund, the European Central Bank and the European Commission.
“The government got a good deal, one that safeguards Portugal,” Socrates said in a televised address to the nation. He did not take questions.
Pedestrians pass an outdoor advertisement which reads “With the IMF, it’s you who pays,” in Lisbon. (Bloomberg)
The aid ensures Portugal can pay its domestic and foreign creditors, but Socrates disclosed few details of the agreement.
The deal has to be endorsed by all European governments. Finland’s recent election cast doubt on whether such a unanimous agreement is possible, as some Finns oppose handing over their tax money to fiscally lax nations.
Finland’s prime minister-elect postponed the formation of a government on Tuesday, generating further uncertainty.
A senior European Union official, speaking on condition of anonymity because he wasn’t authorized to talk about the agreement, said foreign negotiators would speak to opposition parties before revealing the terms of the bailout.
Analysts had expected the loan to be in the region of 80 billion euro ($119 billion).
Portugal is girding to learn the cost of the rescue package it requested to avoid bankruptcy, with officials and analysts fretting over the potentially ruinous consequences of deep austerity measures.
A critical issue is how to calibrate the bailout terms so that they curb spending without dooming the economy. Portugal is eager to avoid the fate of Greece, where the government still has trouble cutting debt ― and many investors expect it to default ― because austerity measures are crimping growth.
Last year Portugal’s budget deficit ― the shortfall of revenue against spending ― reached 9.1 percent of gross domestic product. That’s way above the stipulated 3 percent ceiling for eurozone countries and is likely to force Portugal into enacting deeper debt-reduction policies.
Socrates provided scant details of the agreement but said Portugal’s austerity measures for this year will remain unchanged.
He said the bailout deal set targets of 5.9 percent for this year, 4.5 percent for next year, and 3 percent in 2013.
He said there would be no layoffs of civil servants, no change to job and welfare entitlements enshrined in the Constitution, and no cut in the minimum salary ― measures which trade unions fiercely oppose.
Portugal has to meet debt repayments of around 7 billion euro due in June.
European finance ministers have set a target date of May 16 for the approval of an agreement, and they are demanding that Portugal’s main political parties sign off on the terms.
The negotiations have been particularly delicate because they coincide with campaigning for the election of a new government.
The foreign delegation says it wants to lock all the main political parties into an agreement that will last beyond the election, ensuring the loan will be paid back no matter who wins. That means the parties are being pushed into reconciling their differences on economic policy ― the hottest campaign issue.
As with Greece and Ireland, Portugal’s bailout will come with conditions attached, including fixed interest rates on the loan repayment.
Other likely measures are more tax hikes, pay and pension cuts, and fewer welfare entitlements.
Portugal’s measly annual growth over the past decade of around 0.7 percent is at the heart of its financial problems. That performance left it short of funds and forced it to dig itself deeper into debt.
Apart from lightening the debt load ― known as deleveraging ― the main challenge of the bailout package is fostering growth that will help restore public finances, according to Tullia Bucco of Unicredit Research
That will be no easy task as Portugal is forecast to stay in recession through 2012.
“I definitely think the bailout agreement should strike the right balance between public and private deleveraging and structural measures needed to lift economic potential,” Bucco said.
It is still unclear whether the bailout agreement will aim simply to boost Portugal with some short-term loans or, more ambitiously, seek a longer-term overhaul to make the economy more competitive.
The Bank of Portugal last year identified several areas where deep change is needed, including education, bureaucratic procedures and the legal system.
The IMF has previously singled out long-standing Portuguese job protection laws as ripe for change, with new legislation making it easier to hire and fire workers seen as vital.
However, similar measures implemented in Greece have so far had little success in boosting state revenues there.
Also, they would run into tough opposition from trade unions. The IMF’s liberal economic policies were the target of Labor Day protests in Portugal last weekend.
More austerity ― after a year of successive tax hikes and pay cuts as Portugal scrambled to avoid financial disaster ― will also fuel a popular outcry about falling living standards
Portugal is already one of western Europe’s poorest countries, making further cuts unpalatable for many. Some 340,000 Portuguese are on the minimum monthly wage of 485 euro before tax, and 1.4 million take home less than 600 euro a month,
Civil servants, who fear they will bear the brunt of bailout austerity measures, are due to stage a national strike on Friday that is expected to disrupt schools, hospitals, courts and public offices.