LISBON Portugal's government may be forced to inject at least 1.4 billion euros into struggling town halls this year to avoid bankruptcies, which could complicate its austerity efforts and raise the likelihood of the country needing more bailout funds.
Fernando Ruas, chief of the National Municipalities' Association, told Reuters many municipalities require urgent financial help by the debt-laden state, which is already itself under a 78-billion-euro bailout from the European Union and International Monetary Fund.
He said of total debt held by municipalities - around 12 billion euros according to upwardly revised government estimates - some 1.4 billion euros in short-term debt with maturities of over 90 days and less than one year was the most problematic.
"In order to avoid situations of potential insolvencies at some city halls, the state has to intervene urgently," he said.
Many economists say Portugal will require at least another 30 billion euros in EU/IMF bailout funds, mostly for debt-ridden public companies. The municipalities' debt problems only exacerbate the total needs.
"Short term debt of over 90 days is what worries us most ... because that's the debt municipalities don't have liquidity to pay," he said. "This is the debt to suppliers, mostly local, and this is something that is harming the economy... If we solve the problem of this debt, the situation will improve significantly."
The rest of the debt is mostly medium and long-term at low interest rates, which Ruas said has not yet suffered from nonpayments, but could present a problem in the future.
At the end of 2011, 56 town halls out of a total of 308 accounted for 60 percent of all municipal debts.
He said the association was trying to solve the issue of financial imbalances in city halls with the government.
"That requires aid (by the state), but under very well-defined rules," he added.
"Both sides are quite open in the negotiations and there is interest to resolve this definitively, rather than just provide a breather," he said, adding that he was moderately optimistic about the outcome.
He played down some economists' suggestions that many city halls were already technically bankrupt, saying that the worst-hit 8 municipalities were under adjustment programs similar to Portugal's own budget consolidation under an EU/IMF bailout.
"What happens with financial rebalancing of municipalities is more or less the same that is being done under the 'troika's' intervention in Portugal. Without this intervention, those municipalities would not have had money to pay salaries and everything else."
He called for more state interventions in other troubled municipalities, combining rescue funds and adjustment.
Under the terms of the 78-billion euro bailout, Portugal has to streamline and cut costs in local government by merging municipalities and eliminating some parishes.
The government has been working to identify the exact total of debts held by municipal authorities and companies over the past months, and its latest estimate of around 12 billion euros is far above the previous 8 billion euros estimated at the start of the year.
Although municipal debts have been rising, Parliamentary Affairs Minister Miguel Relvas said earlier this week the government was not overly worried and saw no comparison with the shock unearthing of much larger-than-expected debts on the semi-autonomous region of Madeira last year.
Ruas said austerity imposed by the government slashed transfers of state funds to municipalities, which ceased to receive up to 2.2 billion euros that undermined their liquidity positions along with less taxes due to an economic recession and more aid distributed to the needy.
Regarding the local government reform, which could cut the total number of parishes by about one-fourth, Ruas said that if it were to be done via a dialogue between the government and municipal assemblies it was likely to succeed.
"But it is evident that if the reform is done by simply applying rigid numerical criteria indiscriminately on all the territory, this could cause unrest with consequences that are hard to calculate," he said.
(Writing By Andrei Khalip)