April 12, 2011 / 2:48 PM / 8 years ago

Portugal starts bailout talks; deal seen

LISBON (Reuters) - Portugal launched talks on Tuesday with European authorities and the IMF on a bailout the caretaker government says is needed to cover the country’s financing from June, as politicians jostled ahead of a general election.

Portuguese Finance Minister Fernando Teixeira dos Santos answers a question during the interview with Reuters in Lisbon April 12, 2011. REUTERS/Jose Manuel Ribeiro

Officials from the European Commission, European Central Bank and the International Monetary Fund will pore over Portugal’s public accounts to decide on additional austerity measures they deem necessary for Lisbon to reduce its budget deficit in return for a three-year loan that could reach 80 billion euros ($115.7 billion).

Finance Minister Fernando Teixeira dos Santos acknowledged Lisbon only had its financing needs covered for this month and next, and will need the bailout loans from June onwards.

“We are covered until June. But in June we will be needing the activation of this program,” Teixeira dos Santos told Reuters in an interview, saying he expected Europe to approve the aid program in mid-May.

The country has to pay off 4.9 billion euros in maturing bonds in June.

Economists had seen a bailout for Portugal, following on from Greece and Ireland, as inevitable. But the minority Socialist government only caved in, after months of resistance to foreign aid, when it failed to get its latest measures through parliament.

That failure led to multiple downgrades of Portugal’s credit ratings and a sharp rise in borrowing rates, making it prohibitively expensive for the country to continue borrowing in debt markets.

CARETAKER

The negotiations now will be complicated by the fact that a snap general election is scheduled for June 5 and all parties want to avoid blame for the bailout.

The Socialist government will rule in a caretaker capacity until then. It has said it does not have full powers to agree on a bailout, meaning the opposition Social Democrats, who lead in opinion polls, would be involved in the talks. The policy negotiations of the bailout will start next Monday.

Caretaker Prime Minister Jose Socrates will meet the leaders of main political parties on Wednesday, for the first time since his resignation, a government spokeswoman said.

Analysts say they think politicians will ultimately come together and agree basic terms of a bailout.

Although the bickering continued on Tuesday, Teixeira dos Santos called for a commitment by all political forces to the bailout plan, and a senior Socialist figure played down mutual attacks as a “clarification of positions” and called for a compromise.

“It is true that we now have to get into a phase of finding solutions ... the necessity of obtaining at least minimum consensus between the political parties,” said Francisco Assis, leader of Socialists in the now dissolved parliament.

Adding to the problems that drove Portugal to seek aid and worsening an already gloomy economic outlook, its consumer price index rose a higher-than-expected 1.6 percent on the month in March, with the year-on-rise reaching 4 percent.

The IMF expects Portugal’s economy to contract 1.5 percent this year and 0.5 percent in 2012.

The premium investors demand to hold Portugal’s benchmark 10-year bonds rather than safer German Bunds rose to 548 basis points on Tuesday from around 539 bps on Monday.

The austerity measures already implemented as well as further measures likely to be imposed as part of the bailout deal are expected to depress consumer demand and result in a second economic contraction in three years in Portugal, with 2012 also looking grim, analysts say.

At the heart of the country’s woes are a chronic lack of competitiveness since it adopted the euro more than a decade ago — which means it cannot help its exporters by devaluing its currency. Teixeira dos Santos also pointed to the need to use some of the aid to support its struggling banks.

The rescue package is likely to set the same budget deficit targets the government committed to previously — a cut to 4.6 percent of gross domestic product this year, 3 percent in 2012 and 2 percent in 2013. Last year’s deficit of 8.6 percent overshot a target of 7.3 percent.

The main political parties have already said they are committed to those targets, while bailout-linked adjustments this year will probably entail harsher spending cuts than in the original government’s plan, analysts say.

Additional reporting by Andrei Khalip, Shrikesh Laxmidas, Axel Bugge; editing by Patrick Graham and Leslie Adler

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