Portugal seeks aid, banks set for relief after warning

Wed Apr 6, 2011 10:29pm EDT

* Bailout request follows warning from banks

* Negotiations to take place in midst of election campaign

By Axel Bugge

LISBON, April 7 (Reuters) - Portugal's financial sector can expect some relief after the caretaker government decided to seek financial aid after months of what many economists said was a refusal to acknowledge economic reality.

But Lisbon will have to agree to tough austerity targets to obtain a bailout, and how quickly a deal can be negotiated at the start of an election campaign is unclear.

Caretaker Prime Minister Jose Socrates announced he was asking for financing from the European Union on Wednesday, saying the risks to the economy had now become too great to go it alone as borrowing rates soared in recent weeks.

Following in the footsteps of Greece and Ireland, his request comes against a backdrop of political uncertainty after the government resigned on March 23 following parliament's rejection of an austerity plan.

"I tried everything, but in conscience we have reached a moment when not taking this decision would imply risks that the country should not take," Socrates said in a televised statement.

The decision removes a cloud of uncertainty over the euro zone and has a good chance of ending the spread of debt market crises to other countries in the region.

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WARNING

Portuguese banks will be relieved after taking the unprecedented step on Tuesday of warning that they may no longer be able to buy government debt -- a move which likely helped force the government into seeking help.

Negotiations for financial assistance will take place as a campaign kicks off for a June 5 snap general election which will be dominated by the country's critical economic situation as it enters its second recession in three years.

Socrates cited no figure but a euro zone official estimated Lisbon is likely to need between 60 and 80 billion euros in European and International Monetary Fund loans over three years.

Fernando Ulrich, the head of the country's third biggest private bank -- Banco BPI -- said the decision to recognise help was needed was a "big step", news agency Lusa reported.

But Portugal's negotiations for a loan from the European Union and International Monetary Fund could be more difficult than those of Greece and Ireland.

The Socialist caretaker government has said it has limited powers and parliament, which EU officials say would normally have to ratify any agreement before disbursal, is dissolved until the election.

The head of the Social Democrats, the main opposition party, said he supported the request for aid. But the party, in rejecting an austerity plan by the government last month, helped spark the crisis that led to it.

Tullia Bucco, an economist at Unicredit, said EU finance ministers would consider Portugal's request "in the difficult political environment" at a meeting on April 8-9 in Budapest. (Additional reporting by Noah Barkin in Berlin; editing by Philippa Fletcher)

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