Portugal's €80bn bailout to be drawn down after elections
Portugal is likely to require an €80bn bailout that could be drawn down after a general election on June 5.
The EU/IMF bailout will include a portion that will be used to strengthen Portugal's banks and, similar to Ireland, it will be expected to begin to sell off valuable state assets to raise money to reduce its debt.
The bailout is on foot of a request from Portugal's government for financial assistance and follows similar moves in Ireland and Greece. Portugal's bailout is being negotiated with the outgoing government, and EU finance ministers want all political parties to support whatever deal will emerge by mid-May.
As part of the deal, Portugal's politicians will be forced to make much bigger budget cuts than the deeply unpopular plans proposed by Prime Minister Jose Socrates' government, which proved to be its downfall. Yesterday Europe's finance ministers said the bailout would be conditional on a commitment to huge spending cuts and reforms.
The previous austerity plan that was defeated "is a starting point", EU Economic and Monetary Commissioner Olli Rehn said. The bailout is a move to safeguard financial stability in Europe and to help Portugal overcome its economic difficulties.
Portugal will immediately open its books to the negotiating team that will travel to Lisbon to begin calculating the exact amount of money the country needs to stabilise the economy. ECB chief Jean-Claude Trichet said it was ready to engage in the discussions. "The hard work is to begin immediately," he said.
The deal will demand an "ambitious" fiscal adjustment and structural reform including the sale of valuable state assets.
Portugal has enough money to finance its needs through April and May, Mr Rehn said, but the month of June will be more challenging.
Euro finance ministers instructed the EU, the IMF and Portugal's politicians to negotiate the country's bailout with a view to having it ready to be drawn down after the June elections. Mr Rehn said he expected Portugal would sign up to a fully fledged programme, most likely for three years.
The finance ministers are hoping Portugal's rescue package will underpin confidence in the euro and will not spark further contagion in other economically vulnerable states.
Klaus Regling, the head of the European Financial Stability Facility, said the markets had already reacted positively to news of the latest bailout within the eurozone.
There is a view "this step ringfences the three weaker economies in the euro area and will help to avoid wider contagion", he said.
Spanish debt markets have not been adversely affected over the last few days and there is a strong demand for Spanish bonds, he said.
"The markets understand the fundamentals in different countries much better, which means the risk of contagion is less than it was six to eight months ago," Mr Regling said.
Regarding Portugal's request for financial assistance, Mr Trichet dismissed suggestions the ECB upped the pressure on the government by forcing banks to reduce their exposure to Portugal's debt. The euro system "applied its rule", he said. "We didn't force the banks to do anything, we didn't force the government or the authorities in general ... to do anything
Mr Rehn said he was reassured the caretaker government and all political parties had committed themselves to fiscal rectitude measures. But he added: "We may have to do some final adjustments."