UPDATE 1-Merkel vows to support Portugal's bailout exit decision

Tue Mar 18, 2014 10:54am EDT

BERLIN, March 18 (Reuters) - Germany will support Portugal in its forthcoming decision on how to exit its bailout programme, Chancellor Angela Merkel said on Tuesday, adding that she expected a decision from Lisbon soon partly because confidence in the euro zone was growing.

"It is a decision for the Portuguese government," Merkel said at a news conference in Berlin with Prime Minister Pedro Passos Coelho, adding she was confident Portugal's opposition was also committed to European Union fiscal rules.

"I have no doubt, and the prime minister also told me, that the opposition has acknowledged Europe's fiscal framework ... despite differences on some individual questions," she said.

Many economists think Portugal should seek a precautionary loan accord to ensure that its planned exit from the bailout from the European Union and IMF is smooth.

At the same time, Portuguese bond yields have fallen sharply and are currently trading at the levels of 2010 - a year before it had to seek international assistance.

After an exit, its finances will still be bound by deficit reduction targets set by the 2012 EU fiscal pact. The Socialist opposition has supported the budget pact but says consolidation should be based on growth, not government-backed spending cuts.

The government has said it will only make a decision on whether to seek a precautionary loan about a month before it exits the bailout in May.

"I completely understand it when the Portuguese prime minister says he will take the decision when it needs to be taken and Germany will support any decision. We have stood by Portugal and we will continue to do so," said Merkel.

Passos Coelho said Portugal had not yet decided how to exit the bailout.

"I took the opportunity to tell Chancellor Merkel that the Portuguese government has not yet taken a decision about when we will exit the programme," he said, adding that the main point was that Portugal was discussing "how to exit rather than whether we need another programme".

Merkel reiterated that Portugal was on the right path and that economic growth rates were good, which would help ease high unemployment rates, especially among young people.

Merkel also said it would be important if Europe agrees to a banking union in the next few days.