THE EU and the IMF want to tie Portugal’s opposition parties into a bailout agreement ahead of the coming election as they fear repeating their experience in Ireland.
“No one wants to go down the same road as Ireland again, where one party does a deal and the other wants to unravel it,” according to an official familiar with the situation.
Acting Portuguese finance minister Fernando Teixeira dos Santos will brief his EU counterparts today on the country’s aid application at a scheduled meeting near Budapest, Hungary.
Minister for Finance Michael Noonan will raise Ireland’s request for lower interest on its bailout loans at this meeting, but no decision is expected and Portugal is set to dominate the talks.
A well placed European official said there was considerable surprise at the abrupt decision by acting Socialist premier Jose Socrates to Wednesday night to seek aid, saying he had ruled out such an application in private talks only two days previously.
The official attributed the turnaround to repeated warnings to Mr Socrates from Portugal’s banks that they no longer had “trust” in the country’s sovereign paper and would not invest in it.
Euro zone sources said the EU-IMF authorities were working on the assumption that they can strike a deal on a rescue programme by the end of May, giving Portugal access to a multi-billion-euro credit line in time to repay a big bond in the days after its general election on June 5th.
Sources in three European capitals said the clear preference of the country’s sponsors was to agree a full-blown rescue programme in that timeframe, with each of the country’s main parties giving their imprimatur to the deal before polling day.
Opposition leader Pedro Passos Coelho of the Social Democratic Party, the favourite to win the election, has pledged to back the aid application, but his rejection of an austerity plan last month helped precipitate the poll.
The only way to ensure cross-party support for the package is to involve all parties in talks. The election makes this complicated.
Each of the two main parties in Portugal have been seeking to score points by blaming each other for the aid application. “The sticking point is not the money, it’s how to get the opposition to be comfortable with it,” said an official in reference to strict policy terms in the eventual deal.
The Irish Government bowed to pressure from its European partners not to compel senior bondholders to bear bailout losses on their investment in Irish banks after an election which was dominated by the clamour for the “renegotiation” of the rescue plan.
Officials said Portugal would need at least €75 billion and possibly as much as €90 billion.
As Germany warned Portugal that bailout loans would be available only in return for tough fiscal reforms, European Central Bank (ECB) chief Jean-Claude Trichet said the bank had pressed Lisbon to seek aid.
Officials from the ECB, the EU Commission and the IMF are set to carry out a “troika” mission to Lisbon in the coming days.
Rating agency Fitch said Portugal’s application for aid “will help moderate the near-term risks to macro-economic and financial stability”. The country’s bonds remained under exceptional pressure yesterday as the yield on its 10-year paper rose 0.06 percentage points to 8.595 per cent.
There was little appreciable impact on the price of Spanish debt as investors played down the prospect of any “contagion” effect from Portugal. Spanish economy minister Elena Salgado “absolutely ruled out” any threat to her country, which for many months last year was linked with Portugal and bailout recipients Ireland and Greece in the so-called “PIGS” group. “It has been some time since the markets have known that our economy is much more competitive,” she said.
Analysts at Credit Agricole expressed confidence in Spain.
“Portugal’s bailout request puts the likes of Spain under the spotlight, but we are of the opinion that Spain will not follow due to its improving fiscal situation and recovering economy, while also passing key structural reforms in the labour market,” they said.
