Wednesday, May 4, 2011

Portugal reaches deal on bail-out

Portugal reaches deal on bail-out

Portugal's caretaker prime minister José Sócrates.

Lisbon, Portugal (FT.COM) -- Portugal has reached an agreement with the European Union and the International Monetary Fund on a €78 billion ($116 billion) financial rescue package, becoming the third eurozone country to be bailed out of a sovereign debt crisis.

In a brief television address on Tuesday night, José Sócrates, the country's caretaker prime minister, said the deal was demanding, but indicated that the terms were not as tough as those agreed with Greece and Ireland.

The EU and IMF had recognized that "the situation in Portugal is far from being [as serious] as in other countries," he said. "Knowing other external assistance programs, Portugal can feel reassured."

After the prime minister's address, his office said the bail-out funds would total €78 billion over three years, including financial support for Portugal's banking system. The interest rate to be charged was not specified.

Mr Sócrates said the program would not involve any additional fiscal measures in 2011 and would set out less demanding deficit reduction targets than previously fixed by the government.

Under the plan, Portugal has agreed to reduce its budget deficit from 9.1% of gross domestic product in 2010 to 5.9% this year. The previous target for 2011 had been 4.6% of GDP.

Portugal is now committed to cutting the deficit to 3% of GDP by 2013, a year later than envisaged under the government's previous plan.

Mr Sócrates said the package would not involve any cuts in public sector wages or the the minimum national wage, nor any public sector dismissals.

State-owned Caixa Geral de Depósitos, the country's biggest bank by deposits, would not be privatized. No special taxes would be introduced on holiday bonuses and no change made to the minimum retirement age, he added.

The caretaker prime minister said he would not release further details until the country's main opposition parties had been informed. Opposition leaders are expected to express their approval of the agreement ahead of a general election on June 5.

The agreement follows almost a month of negotiations between the Lisbon government and officials from the European Commission, the European Central Bank and the IMF.

Portugal was under pressure to reach an agreement so that it could receive bail-out funds in time to meet €7 billion in government bond redemptions and interest payments that fall due on June 15.

EU officials want the package to be approved at a May 16-17 meeting of EU finance ministers. But approval could be delayed by disagreements over the package among Finnish political parties, who are trying to form a new coalition government.

Legislation required to implement the program will not go before the Portuguese parliament until after the June ballot.

Portugal was forced to seek a bail-out after the minority Socialists government was defeated over an austerity program in March, forcing Mr Sócrates to resign and sending government borrowing costs soaring.

Earlier a Commission spokesman denied Portuguese media reports that the negotiations had been held up by disagreements between European and IMF negotiators over the terms of the agreement.

"There are no divergences among members of the troika," said Amadeu Altafaj.

The EU will provide about two-thirds of the total funds, the remainder coming for the IMF.

EU loans will come from the European financial stability facility, the bloc's bail-out fund, and later from the European Stability Mechanism, the permanent crisis resolution instrument due to replace it in 2013.