Finnish veto threat clouds Portugal aid talks

LISBON Mon Apr 18, 2011 1:59pm EDT

Jurgen Kroger head of EU delegation (L) Paul Thomson head of IMF delegation (2nd R) and Rasnus Ruffer head of ECB (R) leave the Portuguese Finance ministry after a meeting in Lisbon April 18, 2011. REUTERS/Jose Manuel Ribeiro

Jurgen Kroger head of EU delegation (L) Paul Thomson head of IMF delegation (2nd R) and Rasnus Ruffer head of ECB (R) leave the Portuguese Finance ministry after a meeting in Lisbon April 18, 2011.

Credit: Reuters/Jose Manuel Ribeiro

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LISBON (Reuters) - A crucial new phase of Portugal's bailout negotiations began under a cloud on Monday after an anti-euro party scored big gains in a Finnish election and immediately vowed to derail the pending rescue.

Portuguese debt premiums rose to new record highs, also pushed up by mounting speculation that Greece will be forced to restructure its debt.

Representatives of the European Commission, the European Central Bank and the International Monetary Fund are in Lisbon to set the terms for what would be the euro zone's third bailout in a year after multi-billion euro deals for Greece and Ireland.

They examined Portugal's public accounts last week and on Monday began nitty-gritty policy discussions with the caretaker Socialist government. The IMF delegation is headed by Dane Poul Thomsen who oversaw bailout talks in Greece.

The officials made no comments after the first day of talks at the finance ministry on Lisbon's grand Commerce Square by the Tagus -- a reminder of the country's former imperial grandeur.

The bailout is expected to total 80 billion euros. But before Portugal gets any money it must sign up to a radical economic reform plan, including privatisations, labor market reforms and steps to shore up fragile banks.

The parties aim to seal a deal by mid-May, just weeks before the government faces an acute funding crunch and a snap election due on June 5.

On Tuesday, the so-called "troika" will meet the country's main union CGTP and a top industry group.

Prime Minister Jose Socrates is serving in a caretaker capacity since resigning last month following the rejection of his latest austerity plans by opposition parties in parliament.

With a general election looming, the rescue deal must be approved not only by his government but by the Social Democrats, who are leading in opinion polls.

Despite some pre-election bickering, analysts expect the two leading parties to overcome political differences and commit to the bailout terms.

The leader of the main opposition Social Democrats, Pedro Passos Coelho, said on Monday that the financial aid was "indispensable."

A NEW MENACE

Regardless of how the bailout talks go, the country now faces a new threat from a fellow euro zone member that lies some 3,000 km (1,900 miles) to the north.

In an election in Finland on Sunday, the eurosceptic True Finns party made huge gains to come in a close third and may now be in a position to block or at least complicate Portugal's bailout if it ends up joining the next government in Helsinki.

"The package that is there -- I do not believe it will remain," said True Finns leader Timo Soini.

It may take weeks to know whether the True Finns party can back up its threat, but its success in the election potentially poses a huge risk to Lisbon, which has said it will run out of funds to keep the country running in June.

Any delay in approving the bailout deal beyond the mid-May target could leave European leaders scrambling to find other means of funding for Portugal, a country of 10.5 million that has been targeted by investors during the euro zone crisis because of its high debt levels and uncompetitive economy.

Unemployment in Portugal is at a three-decade high of over 11 percent, education levels are well below the euro zone average and the country depends heavily on industries like textiles, where competition from powers like China is fierce.

The premium investors demand to hold Portuguese benchmark 10-year bonds rather than safer German Bunds broke through the 600 basis point mark for the first time in the single currency's lifetime to settle at 603 bps after Friday's 583 bps.

"There is increased support to euro-skeptical parties and this may make EU leaders a bit more cautious going forward when negotiating attempts to solve the debt crisis," said Niels From, chief analyst at Nordea. "This is weakening the firepower of the euro system."

(Additional reporting by Miguel Pereira; Editing by Hugh Lawson)

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