Eurozone finance ministers will discuss Portugal’s bailout plea on Friday (8 April) and are likely to approve sending an EU-IMF mission to Lisbon on Monday to start negotiating the terms of the deal, sources said.
Portugal on Wednesday became the third eurozone country after Greece and Ireland to ask for financial help from the European Union and the International Monetary Fund after its borrowing costs rose to unsustainable levels following the collapse of the government of José Socrates in March.
Eurozone finance ministers meet informally in Budapest to discuss the response to the sovereign debt crisis, but the focus of the relatively short meeting will be on Portugal.
Prime Minister José Socrates, who resigned a couple of weeks ago, said earlier that he was not in a capacity to negotiate the terms of the aid package because he does not have the political legitimacy to do it.
And the parliament, which normally has to ratify any agreement before disbursal, is dissolved until the elections that are going to be held on 5 June.
According to senior EU sources cited by Reuters, the financial assistance package should be validated before the early June elections, with the first payouts “very likely” to be made beforehand.
The same source said yesterday (7 April) that Portugal should formally apply for help “in one or two days,” allowing EU finance ministers meeting today in Hungary to approve sending a mission to Lisbon to negotiate the terms of the deal.
Under EU rules, such a mission to a country requesting financial aid is necessary to establish the parameters of the support programme, which would then be put into a memorandum of understanding signed by Portugal and the European Commission.
Two other eurozone sources, however, said the ministers were likely to have a preliminary talk on some of the key elements.
“They are likely to discuss how much, roughly, Portugal needs, when, and what it might do in terms of reforms,” a second eurozone source involved in the preparations said.
The source said the amount of the bailout was likely to be in the higher end of 60-80 billion euros, possibly €85 billion, but it was one of the issues that a mission to Portugal would establish.
German Finance Minister Wolfgang Schaeuble, mindful of the concerns among taxpayers in affluent Germany already bearing the brunt of existing bailouts for Greece and Ireland, pointed out that such aid could only be granted in return for tough reforms.
Calling it a “sensible and necessary step”, Schaeuble said in a statement that within the current bailout mechanism, aid was only available in return for “an adjustment programme”.
The first eurozone source said that it was likely the EU would ask Portugal for a similar tightening package as was rejected by the Portuguese parliament in March, but with changes to accommodate the objections of the opposition.
The ministers may also discuss the interest rate that the European Financial Stability Facility will charge for its loans.
A eurozone source said on Wednesday that the interest was likely to be in line with what was legally binding at the moment of issuance.
Interest on EFSF loans is likely to fall by 100 basis points only in June, once eurozone leaders give their final approval to a package of measures to end the sovereign debt crisis.
Portugal’s aid request is being closely watched across Europe, especially in countries that have either already sought help – Greece and Ireland – or see it as a risk, such as Spain.
Eurozone officials hope the bailout of Portugal will finally draw a line under the eurozone sovereign debt crisis.
“I think Portugal was probably the last of the group of countries which were really vulnerable and the markets were really sceptical [as to] whether they can survive or not,” Finnish Finance Minister Jyrki Katainen told Sky News.
“And now when we see that Spain has done a good job, they have done reforms, they have done expenditure cuts and some tax raises, so Spain has regained confidence a lot,” Katainen said.
“And now when we take whatever is needed to stabilise the market by helping Portugal or by putting them to the IMF-EU programme I think the situation will become calmer,” he said.
The economic situation in Ireland after the latest round of stress tests of the country’s financial sector will also be discussed as will reports of Greece’s bigger than expected budget deficit in 2010.
The eurozone ministers will be joined later on Friday by colleagues from non-eurozone European Union countries and by central bank governors.