Portugal’s main opposition party signalled after meeting European and IMF officials yesterday (4 May) that it was likely to back a 78-billion-euro bailout expected to consign the economy to two years of recession.
Caretaker Prime Minister José Socrates announced late on Tuesday (3 May) that Lisbon had reached a three-year bailout agreement with the European Union and International Monetary Fund after weeks of negotiations, becoming the third eurozone country to secure foreign assistance, after Greece and Ireland.
A eurozone source said the financial aid package is expected to total between 75 and 90 billion euros, depending how much assistance Portugal’s banks need.
But a spokesman for Socrates’ office reiterated that Portugal will receive 78 billion euros in bailout loans, including 12 billion euros for the banks.
With elections due in a month, backing for the bailout from the opposition Social Democrats (PSD), who are ahead in the polls, is crucial to guarantee that the EU signs off on the deal.
Carlos Moedas, a Social Democrat official, said a meeting with officials from the lenders went well and that the party would analyse the terms before announcing its stance.
In a sign the PSD is likely to endorse the deal, its main negotiator Eduardo Catroga said the talks were “influenced by PSD proposals,” which he said resulted in “better measures for the Portuguese”.
“I do not see problems with the PSD accepting the deal, which looks like the only possible option for Portugal right now,” said Antonio Costa Pinto, a political analyst in Lisbon.
The European Commission said the EU/IMF mission will hold a news conference today to announce details of the bailout deal.
European officials want to ensure cross-party agreement by Portugal on the bailout in order to avoid the possibility of having to revisit terms of the deal after the 5 June election.
“They [opposition parties] have shown they are very committed, that they are behaving very responsibly,” said European Commission spokesman Amadeu Altafaj.
European officials are also worried that Finland, where an anti-euro party could form part of the next government, may hinder a deal.
Sharp recession looms ahead
Analysts say premier Socrates was eager to present the bailout deal first in an attempt to highlight the fact that it did not set measures as tough as those adopted by Greece and Ireland, hoping to gain an electoral advantage.
But according to the bailout memorandum, the terms to be included, such as higher taxes and steep spending cuts, point to a contraction of 2% in gross domestic product this year and the same in 2012.
That will make it even more of a challenge for the heavily indebted country, which has had some of the lowest growth rates in Europe for a decade, to return to financial health.
Jonathan Loynes, chief European economist at Capital Economics, also forecast a 2% contraction this year.
“While the confirmation of the bailout should provide some reassurance that Portugal will be able to meet its upcoming bond redemptions, it won’t put an end to speculation that – along with Greece and perhaps others – it will sooner or later need to undertake some form of debt restructuring,” he said.
The announcement did provide some relief in the bond market, where Portuguese 10-year yields fell for the first time in many weeks, to around 9.95%, from a euro lifetime record of 10.32% on Tuesday. The spread to German Bunds shrank to 666 basis points from Tuesday’s high of 707.
Portugal was forced to seek a bailout after its government collapsed last month, sending its borrowing costs soaring.
In a reminder of the sharply rising rates Portugal faces in the markets, the country issued 1.12 billion euros in three-month treasury bills at 4.652%, far above a rate of 4.046% last month.
Deficit goals eased
Lisbon won some leeway for its austerity drive from its lenders. This year’s budget deficit target was raised to 5.9% of gross domestic product from 4.6% previously.
That still represents a sharp cut given the deficit totalled 9.1% of GDP last year and, under the deal, it must be lowered to 4.5% of GDP in 2012 and 3% in 2013.
The bailout deal includes up to 12 billion euros for the banking sector to recapitalise and orders banks to raise their core Tier 1 capital ratios gradually to 10% by the end of 2012, the official source said.
It also envisages 5.3 billion euros in privatisation revenues up to 2013.
The interest rate on Portugal’s bailout loan is expected to be set at a meeting of eurozone finance ministers in mid-May.
“Even though we have clarity regarding the amount, the more interesting detail will be the interest rate that Portugal will have to pay on the loans so we are still waiting for this,” said WestLB rate strategist Michael Leister.
Portuguese agreement to the loan terms is needed by 15 June, when Lisbon has to redeem 4.9 billion euros of bonds.
Officials from the European Commission, the International Monetary Fund and the European Central Bank have been in Lisbon for almost a month to hammer out the agreement.