Portugal votes for new govt under bailout shadow

Barry Hatton, Associated Press, On Sunday June 5, 2011, 4:03 am

LISBON, Portugal (AP) -- Portuguese voters were electing a new government Sunday to steer them through expected years of recession and grinding austerity measures being adopted in return for a euro78 billion ($114 billion) bailout.

Portugal is one of the eurozone countries with an economy wrecked by debt, compelling it to call for a rescue loan two months ago.

A recent election in Ireland -- which also needed a bailout -- spelled the end of the government, and polls indicate Portugal's main opposition Social Democratic Party will unseat the Socialists.

The winner will inherit a record jobless rate of 12.6 percent and a forecast economic contraction of 4 percent over the next two years in what is already one of western Europe's poorest countries.

Necessary welfare and pay cuts, tax hikes and promises of strikes from trade unions will also present tough challenges for the new administration as it tries to engineer the growth Portugal will need to cut itself free of its ruinous debt load.

Portugal is locked into debt-reduction targets established as part of the bailout deal, limiting its room for maneuver. But President Anibal Cavaco Silva said the new government will have "much to decide and do" and appealed against abstention among the country's 9.6 million registered voters.

"The fact that the elections take place at a time of sacrifice and serious doubts about our future makes it especially important that each person expresses their will," Cavaco Silva said in a televised address to the nation Saturday night.

Any sign Portugal is not abiding by the terms of its bailout agreement with its European partners and the International Monetary Fund, who put up the money, will likely aggravate Europe's debt crisis. There are already signs of bailout fatigue among the continent's wealthier nations as Greece's financial future remains uncertain.

Keeping the political peace won't be easy.

The election -- the country's second in two years -- comes after months of political squabbles over how best to reduce the debt burden. Opposition parties refused to accept the outgoing Socialist government's austerity plans, prompting the administration to resign and worsening Portugal's financial plight.

The center-right Social Democrats, favored to win by opinion polls, have asked for an emphatic endorsement at the ballot box that would give them a strong mandate to enact unpopular fiscal measures and introduce longer-term economic reforms such as making it easier to hire and fire workers -- a proposal parties on the left have balked at.

If he falls short of a strong majority in the 230-seat Parliament, which approves legislation, Social Democrat leader Pedro Passos Coelho could invite the smaller, conservative Popular Party to join it in a coalition government.

All three main parties gave their blessing to the bailout deal, though they differ over how to meet the debt targets and the possible privatization of public services.

The Portuguese Communist Party and its like-minded rival the Left Bloc, which are each expected to get less than 10 percent, have fought against economic liberalization but could potentially support the Socialists in Parliament.

The Bank of Portugal said in a report last month that economic hardship will be "particularly severe" in coming years, with an "unprecedented" drop in family income.

Portugal has lived beyond its means during the past decade of average annual growth below 1 percent. It took advantage of cheap loans as a member of the 17-nation eurozone to build up debt which financed its western European lifestyle of welfare entitlements and job security.

Portugal needs to increase its exports amid feeble domestic demand. As a member of the eurozone it can't devalue its currency to make its goods cheaper abroad, but it can reduce pay and take other steps to cut costs.

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IMF approves $36.8 billion loan for Portugal

WASHINGTON (Reuters) – The International Monetary Fund on Friday approved a 26 billion euro ($36.8 billion) loan for Portugal to help the country recover from a debilitating sovereign debt crisis, saying it would immediately disburse 6.1 billion euros to ease investor concerns over the euro zone member's debts.

The IMF said in a statement that total financing to Portugal in 2011 will include about 12.6 billion euros from the IMF and another 25.2 billion euros from the European Union. The funding is part of a joint IMF/EU 78 billion euro ($110 billion) bailout package.

"The financing package is designed to allow Portugal some breathing space from borrowing in the markets while it demonstrates implementation of the policy steps needed to get the economy back on track," the IMF said in a statement.

The financial package was calibrated to allow Portugal to stay out of the market for medium- to long-term bonds for slightly more than two years, IMF Mission Chief Poul Thomsen said.

Under the agreement, Lisbon will have to carry out steep spending cuts, raise taxes, reform its labor and justice systems, and embark on an ambitious privatization scheme.

"The Portuguese authorities have put forward a program that is economically well-balanced and has growth and job creation at its center," said IMF Acting Managing Director John Lipsky.

"It addresses the fundamental problem in Portugal -- low growth -- with a policy mix based on restoring competitiveness through structural reforms, ensuring a balanced fiscal consolidation path, and stabilizing the financial sector," he added.

The deal follows a 110-billion-euro package for Greece last May and an 85-billion-euro program for Ireland in November.

Portugal's arrangement is the first time a country has asked private investors not to sell down their holdings of bonds on a voluntary basis.

The leader of Portugal's opposition Social Democrats, Pedro Passos Coelho, warned on Thursday the country has no room for failure in meeting the austerity measures of the program.

The conditions included in the bailout are expected to contribute to a contraction in the Portuguese economy of 2 percent both this year and next.

"This is not going to be an easy program. There is going to be a difficult period of adjustment," Thomsen said.

The program addresses a lack of competitiveness among businesses in Portugal, he said. It sets a goal of achieving a deficit that is 3 percent of GDP by 2013.

"Even during the good years, before the crisis, Portugal was hardly growing," Thomsen noted.

Portugal's economy is expected to begin expanding again in two years, he said, adding that many of the initiatives are weighted heavily to the early phases of the reforms.

Poulsen said he believes political consensus behind reforms bodes well for the success of measures to reshape the Portuguese economy.

"It's quite striking how most of the key issues, not least on the structural reform side, have broad political support, which to me is one of the encouraging things," he said.

(Additional reporting by Lesley Wroughton; Editing by Diane Craft, Gary Crosse)

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IMF approves 26 billion euro loan for Portugal

WASHINGTON (Reuters) – The International Monetary Fund on Friday approved a 26 billion euro ($37 billion) loan for Portugal to help the country recover from a debilitating sovereign debt crisis, saying it would immediately disburse 6.1 billion euros to ease investor concerns over the euro zone member's debts.

The IMF said in a statement that total financing to Portugal in 2011 will include about 12.6 billion euros from the IMF and another 25.2 billion euros from the European Union. The funding is part of a joint IMF/EU 78 billion euro ($110 billion) bailout package.

"The financing package is designed to allow Portugal some breathing space from borrowing in the markets while it demonstrates implementation of the policy steps needed to get the economy back on track," the IMF said in a statement.

The financial package was calibrated to allow Portugal to stay out of the market for medium- to long-term bonds for slightly more than two years, IMF Mission Chief Poul Thomsen said.

Under the agreement, Lisbon will have to carry out steep spending cuts, raise taxes, reform its labor and justice systems, and embark on an ambitious privatization scheme.

"The Portuguese authorities have put forward a program that is economically well-balanced and has growth and job creation at its center," said IMF Acting Managing Director John Lipsky.

"It addresses the fundamental problem in Portugal -- low growth -- with a policy mix based on restoring competitiveness through structural reforms, ensuring a balanced fiscal consolidation path, and stabilizing the financial sector," he added.

The deal follows a 110-billion-euro package for Greece last May and an 85-billion-euro program for Ireland in November.

Portugal's arrangement is the first time a country has asked private investors not to sell down their holdings of bonds on a voluntary basis.

The leader of Portugal's opposition Social Democrats, Pedro Passos Coelho, warned on Thursday the country has no room for failure in meeting the austerity measures of the program.

The conditions included in the bailout are expected to contribute to a contraction in the Portuguese economy of 2 percent both this year and next.

"This is not going to be an easy program. There is going to be a difficult period of adjustment," Thomsen said.

The program addresses a lack of competitiveness among businesses in Portugal, he said. It sets a goal of achieving a deficit that is 3 percent of GDP by 2013.

"Even during the good years, before the crisis, Portugal was hardly growing," Thomsen noted.

Portugal's economy is expected to begin expanding again in two years, he said, adding that many of the initiatives are weighted heavily to the early phases of the reforms.

Poulsen said he believes political consensus behind reforms bodes well for the success of measures to reshape the Portuguese economy.

"It's quite striking how most of the key issues, not least on the structural reform side, have broad political support, which to me is one of the encouraging things," he said.

(Additional reporting by Lesley Wroughton; Editing by Diane Craft, Gary Crosse)

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Portugal Begins Talks With Officials on Possible Bailout

LISBON — International creditors started discussing the terms of a bailout for Portugal on Tuesday amid concerns that their initial challenge would be to sort out the country’s political disputes rather than its financial situation.

The negotiators will seek to persuade feuding political parties to bury differences that have intensified in the buildup to a general election on June 5, which was called because of a parliamentary standoff over how to clean up the Portuguese government’s finances.

The creditors are expected to negotiate an assistance program for Portugal worth about 80 billion euros, or $116 billion, that is both broader and more stringent than a package of austerity measures that lawmakers rejected last month.

The rejection led to the resignation of Prime Minister José Sócrates, who remains at the helm of a caretaker Socialist government until the general election.

Officials from the European Commission, the European Central Bank and the International Monetary Fund will also want the terms of such a program to be endorsed by Portuguese opposition parties to ensure that a deal remains binding whatever the outcome of the June 5 vote.

Despite the political wrangling in Lisbon, analysts suggested that Portugal could not afford to delay a bailout deal beyond mid-May, the deadline set by European Union finance ministers last week.

“Political divisions are likely to keep weighing on the drafting of the program,” Tullia Bucco, an economist at UniCredit, wrote in a research report. “But the involvement of I.M.F. and E.U. officials should help ease potential tensions and forge a consensus on the needed measures.”

The bailout talks in Lisbon this week are expected to start with a technical assessment of Portugal’s finances, including the accounts of its banking sector.

To add to the uncertainty, the election might not produce a clear-cut outcome. The main opposition Social Democratic Party is expected to win, but without an absolute majority. The most recent opinion poll, released last week and carried out by the Catholic University of Portugal, showed Mr. Sócrates and his Socialist party narrowing the gap — an outcome that raised the possibility of a hung Parliament.

“Nobody looking at Portugal’s economic and political prospects should rule out Sócrates at this stage, because he has certainly not lost as much support as one might expect in this crisis and is at his strongest when campaigning,” said Cristina Casalinho, chief economist of BPI, a Portuguese bank.

Tough conditions set by international creditors could set off more social unrest and raise protectionist sentiment, playing into the hands of far-left politicians, led by the Communists, who arguably remain more powerful in Portugal than anywhere else in Western Europe.

This week, leftist groups started erecting billboards around Lisbon condemning an anticipated demand by creditors for more privatizations, under the slogan that “With the I.M.F., the one who pays is you.”

Portugal is following Greece and Ireland in requiring international assistance. The concern in Portugal is that tough bailout terms will leave the country with crippling repayment obligations that the country cannot count on economic growth to help it meet. The monetary fund projects that Portugal will remain in recession until 2012.

Political feuding in Lisbon has kept Portugal’s debt yields close to record highs since the rescue request last week. The yield on 10-year Portuguese bonds rose one basis point, or one hundredth of a percentage point, to 8.411 percent on Tuesday.

Portugal’s woes are being watched in Spain, a much larger euro zone economy that has also been in investors’ firing line because of its budget deficit and troubled banking sector. Spain’s borrowing terms have improved in recent weeks, however, after the central government met its 2010 deficit target. The yield on 10-year Spanish bonds fell 5 basis points Tuesday to 5.165 percent.

In a further vote of confidence, the Chinese prime minister, Wen Jiabao, said Tuesday that China would continue buying Spanish bonds, after recently buying about 6 billion euros. His comments followed a meeting in Beijing with Prime Minister José Luis Rodríguez Zapatero.

Having resisted for months the idea of a bailout, the Portuguese authorities now insist some of the rescue financing must be delivered by June. The Portuguese Treasury had a cash balance of 3.3 billion euros at the end of March, which it subsequently strengthened by selling some additional debt — although at high interest rates — to meet 4.5 billion euros in repayments due Friday.

Portugal next faces repayment obligations of about 7 billion euros in June, its toughest refinancing hurdle of the year.

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Portugal opposition pledges support over bailout

The leader of Portugal's opposition Social Democrats (PSD) said on Wednesday his party is ready to provide all help necessary to the government to ensure the country secures a bailout from Europe and the IMF. Skip related content

His comments struck a conciliatory tone after the government's request last week for a bailout, which could reach 80 billion euros (70 billion pounds), prompted jostling by politicians to avoid blame for the economic and financial crisis that forced the country to seek assistance.

"Conscious of the seriousness of the situation, the PSD will not hesitate in offering all the help it can so that the programme for assistance can be met," PSD leader Pedro Passos Coelho told reporters after meeting caretaker Prime Minister Jose Socrates.

Socrates met leaders of all political parties on Wednesday to inform them about the bailout negotiations.

European officials have urged cross-party agreement in Portugal on the terms of a bailout, which is sure to include new austerity measures, as it will be up to a new government to implement the plan after a snap election on June 5.

"The PSD is interested in saving the country from a situation whereby there would be no agreement on obtaining aid," Passos Coelho said. "Portugal needs this assistance."

Cabinet Minister Pedro Silva Pereira told reporters after the meetings that the government had asked opposition parties not to cast doubt on Portugal's public accounts in the "public domain" during the delicate negotiating process with foreign lenders.

"Portugal's public accounts are completely transparent," Silva Pereira said, adding that Wednesday's meetings served to establish lines of communication with opposition parties on the bailout negotiations.

Passos Coelho said earlier he hoped there would be no "skeletons in the closet" regarding public accounts.

EU URGES RESPONSIBILITY

EU Commission President Jose Manuel Barroso, himself a former Portuguese prime minister, said in Brussels that there will be strict conditions on the loan and a schedule will have to be defined quickly.

"So, what I ask from each and every decision-maker in Portugal is: let's be responsible, because the situation is a tough one, and it is an issue of the utmost urgency," Barroso said.

Finance Minister Fernando Teixeira dos Santos told Reuters on Tuesday he hoped the bailout would be finalised and approved in mid-May, in time to cover financing needs from June.

The outgoing government resigned on March 23 after parliament, including the Social Democrats, rejected a new austerity plan.

Passos Coelho said that since his party rejected those measures it had become clear that the country's finances were in a worse state than had been assumed after data showed Portugal overshot its budget deficit goal for 2010.

There is still opposition to the bailout in Portugal, and left-wing leaders who met Socrates urged voters to express their objection to the foreign aid at the June 5 election.

"We insist that the decision of the Portuguese (at the election) is not a plebiscite to surrender to a solution which implies the destruction of the Portuguese economy," said Francisco Louca, head of the small Left Bloc party.

Unions have called a general strike on May 6 and there have been large protests against austerity in recent weeks.

"We want to make clear that this is not foreign assistance, this is a foreign intervention," said Communist Party leader Jeronimo Sousa.

Officials from the European Commission, European Central Bank and IMF started looking over Portugal's public accounts on Tuesday to decide what extra austerity measures they deem necessary for Lisbon to reduce its budget deficit in return for a three-year loan.

(Reporting by Shrikesh Laxmidas; writing by Axel Bugge; Editing by John Stonestreet/Ruth Pitchford)

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Portugal Seeks Bailout From EU After Failing to Stem Crisis

April 07, 2011, 11:10 AM EDT By Joao Lima, Jim Silver and Anabela Reis

(Updates with comment from Fitch Ratings in seventh paragraph, more comments from Silva Pereira in ninth.)

April 7 (Bloomberg) -- Portugal is set to start hammering out a bailout package that may total 75 billion euros ($107 billion) as it becomes the third euro-region country to seek European Union aid.

The Portuguese government will make a formal aid request to the European Commission today, government minister Pedro Silva Pereira said today at a press conference in Lisbon. The request comes as Finance Minister Fernando Teixeira dos Santos travels to Budapest to meet with other officials from the other 16 euro nations near Budapest tomorrow.

Portugal is the latest nation to seek an EU-led bailout after Greece sparked a sovereign-debt crisis that threatened to splinter the euro region a year ago and then engulfed Ireland. The challenge for Teixeira dos Santos will be negotiating an interest rate on bailout loans that doesn’t strangle an economy that’s barely grown in the past decade or spark the public outcry that greeted Ireland’s bailout package in November.

“Clearly the view of the market was that this was inevitable and that it was only a matter of timing even if we still don’t know what the deal will be,” said Julian Callow, chief European economist at Barclays Capital in London.

No Choice

Prime Minister Jose Socrates said last night he had no choice than to seek aid as the country faces 9 billion euros of bond maturities in April and June. The yield on Portugal’s 10- year bonds, which hit a record after Socrates resigned last month and early elections were called, rose 6 basis points to 8.595 percent today. Portugal yesterday sold one-year notes at a yield of 5.9 percent, 200 basis points more than Germany pays for 30-year debt.

The euro weakened 0.2 percent to $1.4299 at 4:00 p.m. in Lisbon today. The difference in yield between that Portuguese 10-year bonds and comparable German bonds widened 6 basis points to 517 basis points today. The cost of insuring Portuguese sovereign debt rose 8 basis points to 562, according to CMA prices for credit-default swaps. The contracts earlier traded as low as 532 basis points.

Fitch Ratings said in a statement today that Portugal’s aid request “will help moderate the near-term risks to macro- economic and financial stability.”

Three Weeks

German Finance Minister Wolfgang Schaeuble said today that it will take two-to-three weeks to assess a request for European aid made by Portugal. Conditions will be attached to any bailout granted, he said in an e-mailed statement.

The conditions and the amount of EU financial aid has not been defined yet, government minister Silva Pereira said at a press conference in Lisbon today.

“What we expect is that this request for financial assistance can provide the immediate response that our economy needs,” the minister said.

Portugal’s package is likely to be worth as much as 75 billion euros, said two European officials with knowledge of the situation. Portugal may pay rates similar to what Greece is being charged for its rescue loans, which were renegotiated last month, Goldman Sachs Group Inc. said in a report to clients.

Greece pays an average of 3.5 percent for the first three years of its plan and 4.5 percent thereafter. Ireland, which is also trying to get lower terms, currently pays an average of 5.8 percent.

Greek Rates

“We would assume that it would be lower, as Greece got a 100 basis point cut in its rate, and Ireland could have gotten something similar if they had played ball on their corporate tax rate,” said Padhraic Garvey, head of developed-market debt at ING Groep NV in Amsterdam.

The Social Democrats, Portugal’s biggest opposition party, would aim for a lower interest rate on the aid program than the rate on the Irish package, Antonio Nogueira Leite, an adviser of the Social Democratic Party, said today in a Bloomberg Television interview. The Social Democrats lead Socrates’ Socialist party in opinion polls, and elections are set for June 5.

The terms of Portugal’s bailout package must be tighter than they otherwise would have been given the political situation caused by the pending elections, Finnish Prime Minister Mari Kiviniemi said.

Portugal will need about 15 billion euros to 20 billion euros to tide it over until the country gets a new government, Swedish Finance Minister Anders Borg said at a press conference in Stockholm today. Sweden is “very far” from having reached a decision on whether it will contribute to a Portuguese bailout, Borg said. Portugal should have acted last autumn to seek financial aid, he said.

Spain

Portugal’s announcement sparked optimism that the worst of Europe’s sovereign debt crisis is over and won’t threaten Spain, the euro region’s fourth-largest economy. The premium investors demand to hold Spanish debt over German bunds rose 2 basis points to 182 basis points today, and has dropped more than 100 basis points from its euro-era record in November.

Spanish Finance Minister Elena Salgado said she “absolutely rules out” contagion from Portugal as “markets absolutely distinguish between the two countries.”

“We do not expect any other EMU sovereign to be in need of financial assistance,” Francesco Garzarelli, Goldman Sachs London-based chief interest-rate strategist, in a report to clients.

At the same time, the euro region is still threatened by the risk that countries receiving aid won’t be able to tame their deficits and may be forced to restructure debt.

Restructuring Risk

“The urgent question still remains whether sovereign debt will have to be restructured, particularly in the case of Greece,” said Torge Middendorf, an economist at WestLB in Dusseldorf. “Should there indeed be a restructuring, Germany’s banks would be hit particularly hard.”

At 12.7 percent, Greek 10-year bond yields are almost 390 basis points higher than last April before the country received bailout funds. Standard & Poor’s Ratings Services said last week Greece may have to restructure its debt as “there are growing risks to the sovereign’s budgetary position.”

European governments will also be facing higher interest rates after the European Central Bank raised its benchmark rate a quarter point to 1.25 percent, the first increase since 2008.

The ECB has already suspended collateral conditions for all securities guaranteed by the Greek and Irish governments and Portuguese banks have been virtually cut off from interbank markets. The ECB had “encouraged” Portugal to seek EU aid, ECB President Jean-Claude Trichet said at a press conference in Frankfurt today.

Banks Gain

Banks led the gains on Portugal’s benchmark PSI-20 Index today, with Banco Espirito Santo SA adding 5.1 percent to 3.016 euros and Banco Comercial Portugues SA advancing 3.9 percent to 61.3 euro cents.

Portugal’s bond yields surged to records this month after Socrates resigned on March 23 when parliament rejected new austerity measures that aimed to bring the euro region’s fourth largest budget deficit within the EU’s limit of 3 percent of gross domestic product next year.

Portugal reported a 2010 budget deficit last week equal to 8.6 percent of gross domestic product, higher than the 7.3 percent the government had previously forecast, after a change in EU accounting rules forced it to add more than 2 billion euros in charges to last year’s accounts.

--With assistance from James G. Neuger in Brussels, Emma Ross- Thomas in Madrid, Kevin Costelloe and Sandrine Rastello in Washington, Dan Tilles in London, Tony Czuczka, Alan Crawford and Rainer Buergin in Berlin and Susan Li in Hong Kong. Editors: John Fraher, Andrew Davis

To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net; Jim Silver in Lisbon at jsilver@bloomberg.net; Anabela Reis in Lisbon at areis1@bloomberg.net.

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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Portugal PM says bailout, IMF loan not an option

LISBON: Portugal's caretaker Prime Minister Jose Socrates vowed on Monday, April 4 to keep resisting a foreign financial rescue for the debt-laden country, including a short-term loan the opposition said it could back.

Portuguese bond yields have surged to record highs since Socrates resigned last month when parliament rejected an austerity package. The country's credit rating has been downgraded sharply since then, raising pressure on Lisbon to seek a bailout as it prepares for a general election on June 5.

Many economists think it is almost inevitable that Portugal will need a bailout like Greece and Ireland and some suggest at least an emergency loan may be necessary until the elections to allow Portugal repay its maturing debt and finance its needs. "I am committed to the idea of defending Portugal from external aid ... I will do everything to defend Portugal from this scenario," Socrates told the RTP television.

He reiterated that in his view a bailout would weaken Portugal and, ultimately, the euro currency. "The foreign aid scenario is the last resort," he said.

Asked if a short-term loan from the International Monetary Fund was possible if the country faces immediate financing problems, Socrates said: "I don't know of any IMF financing line that would not enforce a programme with conditions."

"All programmes that have been negotiated so far were very severe in terms of measures demanded from a country," he said.

The leader of the main opposition Social Democrats (PSD), Pedro Passos Coelho, told Reuters on March 26 his party, which leads in opinion polls, would back a loan if the country's financial crisis escalates until the election. [ID:nLDE72P0BM]

A euro zone source told Reuters earlier euro zone finance ministers will on Friday discuss Portugal's options to solve its debt problems under a caretaker government, including whether it is capable of requesting EU financial aid. [ID:nLDE7331TJ]

Socrates, in his turn, said the caretaker government he leads will use "all instruments available" to guarantee timely repayment and refinancing of Portugal's debt ahead of bond expiries this month and then in June. Portugal has to repay some 4.3 billion in maturing bonds on April 15.

He did not say what those instruments could be, saying only that "we cannot reveal all our strategy to the markets". Portugal has arranged some private debt placements since the start of the year in addition to normal debt auctions. On Friday, it successfully sold over 1.6 billion euros ($2.3 billion) in bonds in an extraordinary auction after having lined up investors to buy the debt beforehand, according to traders.

Still, Portugal's bond yields continued to rise, with the 5-year maturity rising above 10 percent on Monday.

Socrates said he will fight to win the snap election, and that if he does win without obtaining a full majority, he will seek to build a coalition government.

"If the Socialist party wins without a (full) majority), I will do my best for Portugal to have a majority government. We will be open to dialogue, compromise and negotiation as we have always been," he said.

The Social Democrats lead in opinion polls, but most surveys show them with ratings below those needed to secure a full majority, while the Socialists are still running strong.

An opinion poll by Aximage pollsters published on Monday showed PSD's lead narrowing to 6.4 percentage points from last month's 10 points. The PSD fell to 34.8 percent of voting intentions from 37.9 percent, while the Socialists edged up to 28.4 percent.

The confidence ratings of PSD's Passos Coelho and Socrates were practically equal at just over 35 percent, according to Aximage, which surveyed 600 people between March 28 and 30.

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Portugal Plans to Ask Europe for a Financial Bailout

José Sócrates, Portugal’s prime minister, said in a televised address Wednesday night that he had requested aid from the European Commission after recognizing that borrowing costs had become unsustainable.

“I had always considered outside aid as a last recourse scenario,” he said. “I say today to the Portuguese that it is in our national interest to take this step.”

He did not, however, specify the timing of any bailout.

Portugal will probably need about 75 billion euros ($106.5 billion) in assistance, according to a recent estimate by Jean-Claude Juncker, the prime minister of Luxembourg, who presides over meetings of euro zone ministers. Some analysts have suggested that the amount could be as much as 100 billion euros.

A Portuguese bailout has long been expected, but the speed with which things moved Wednesday appeared to have taken European officials in Brussels by surprise, leaving the timetable unclear. European leaders have been working to keep the financial contagion from spreading. Lisbon’s move now puts pressure on Spain, which has undertaken major economic reforms, budget cuts and a banking clean-up to stay out of danger.

In a statement the president of the European Commission, José Manuel Barroso, said Portugal’s request “will be processed in the swiftest possible manner, according to the rules applicable.”

If the pattern of previous bailouts is repeated, a team of officials will be sent to Lisbon to discuss the conditions of a bailout, which will then need to be agreed upon by European finance ministers. That, however, will probably not happen for several weeks.

Caught in a political crisis and facing tough refinancing hurdles, Portugal has also been hit by repeated downgrades by credit-rating agencies, sending yields this week on Portuguese government debt to their highest levels since the introduction of the euro.

Mr. Sócrates, who had been governing without a parliamentary majority, resigned last month after lawmakers rejected his latest austerity package. To break the political deadlock, Portugal is set to hold a general election on June 5.

In a separate televised address, Pedro Passos Coelho, the leader of the main Social Democratic opposition party, said that he backed the decision to seek outside help.

Adding to the pressure on the government, Portuguese banking executives warned this week that they did not want to take on more sovereign debt, urging the government to negotiate a bridge loan with its European partners.

Alongside that of Portuguese banks and companies, “the rating of the country has fallen like never before,” Mr. Sócrates said. “This is a particularly serious situation for our country.”

European ministers agreed last May to provide 80 billion euros in loans to Greece over three years as part of a package in which the International Monetary Fund provided an additional 30 billion euros. In November, they also agreed to a rescue package worth up to 85 billion euros for the Irish government.

Last month, leaders of the euro zone countries agreed to cut the interest rate charged Greece to help ease its debt burden. No such agreement was made with Ireland because of Dublin’s refusal to accede to French and German requests to raise its low corporate tax rate of 12.5 percent.

For Portugal, the emergency financing will ensure that it can meet its 20 billion euros of borrowing requirements for the year. But it is likely to set off debate over what conditions will be tied to any rescue package, at a time when Portugal struggles with record unemployment and an economy that is likely to contract 1.3 percent this year, according to a recent forecast from the Bank of Portugal.

Further, the government’s recent effort to push through an austerity package combining more spending cuts and tax increases prompted Portuguese residents to take to the streets last month in a sign of rising social unrest.

“Outside intervention will be positive for our treasury but could be a disaster for our economy,” said Diogo Ortigão Ramos, a specialist on fiscal legislation at a law firm, Cuatrecasas, Gonçalves Pereira. “Whoever forms the next government, our creditors will have the final word.”

Mr. Sócrates said that the decision to seek help was taken amid expectations that market conditions would continue to worsen for Portugal.

Analysts suggested that markets would respond cautiously on Thursday given the uncertainty surrounding the terms of any bailout.

“I expect that the news will bring only limited relief” to the yield spread between Portuguese bonds and those of Germany, the reference securities in the euro zone, said Tullia Bucco, economist at UniCredit, adding that “it will not refrain the European Central Bank from delivering a 25 basis point interest rate hike” this week.

Earlier on Wednesday, Portugal sold Treasury bills at a much higher cost than last month. It sold 455 million euros (about $646 million) in one-year Treasury bills at an average yield of 5.9 percent, compared with 4.33 percent yield when Portugal last sold such bills on March 16.

The national debt agency also sold 550 million euros of six-month bills at an average yield of 5.12 percent, compared with a yield of 2.98 percent at a previous auction on March 2. The Treasury bill sale came after Moody’s on Tuesday cut the sovereign rating of Portugal for the second time in a month. On Wednesday, Moody’s also downgraded by one or more notches the senior debt and deposit ratings of seven Portuguese banks.

Stephen Castle contributed reporting from Brussels.

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Portugal sees "irreparable damage" in debt cost

LISBON (Reuters) – Portugal's caretaker government, fighting to avoid a bailout, said on Wednesday a political crisis had caused "irreparable damage" after borrowing costs rocketed as it sold a billion euros in short-term debt.

The sale of 6- and 12-month treasury bills brought some temporary relief for a country grappling with soaring rates, political uncertainty, rating downgrades and a warning by local banks they may no longer be able to buy government debt.

But the yield on 12-month T-bills spiked to 5.902 percent from 4.311 percent three weeks ago, and on six-month bills to 5.117 percent from 2.984 percent, highlighting the financial pressure ahead of big redemptions this month and in June.

"I suspect that as far as the market is concerned, funding at these levels can only be viewed as a temporary measure," said Peter Chatwell, rate strategist at Credit Agricole.

Portugal's cost of credit has leapt since the minority Socialist government resigned last month after a parliamentary defeat on tougher austerity measures, casting the country into political limbo. An early general election is set for June 5.

The finance ministry said the auction was a confirmation of the deterioration caused by the rejection of the austerity plan and promised to take all measures necessary to ensure liquidity and financing for the economy. But it denied talking with the European Union about how to meet borrowing needs.

"Current interest rates make it possible to conclude that the damage caused by the rejection of the austerity plan is irreparable," a ministry statement said.

The government previously has held out hope that by steadily meeting budget goals and cutting spending it could regain investor confidence.

It admitted last week that the 2010 budget deficit had hit 8.6 percent of gross domestic product, far above its 7.3 percent target, but said this year's goal of 4.6 percent would be met.

Local banks delivered an unprecedented warning to the government on Monday to seek a short-term emergency loan to soothe market concerns ahead of the election, saying that under current conditions they cannot continue buying government debt.

"There has been a very important signal from the banks for the future," said BNP Paribas analyst Ioannis Sokos. "Portugal can still make it through April, but probably won't get to June without a bailout."

MOODY'S DOWNGRADES BANKS

Adding pressure on banks, Moody's rating agency followed up a one-notch sovereign downgrade and cut the creditworthiness of seven local banks, citing concerns over their own situation and the government's ability to support them.

The banks concerned included state-run CGD and leading listed banks Millennium bcp, Banco Espirito Santo and Banco BPI.

Still, bank shares rose in tandem with rebounding European banking stocks on Wednesday, with Millennium and BES jumping 4.2 percent and 3.5 percent respectively. Still, the shares have fallen sharply in the last two weeks.

EU finance ministers meeting in Budapest at the end of this week will try to get clarity from the caretaker government on what sort of support, if any, it can seek ahead of the election.

The European Commission said on Wednesday there were no discussions about releasing aid because Lisbon has not applied for assistance.

Spain's Economy Minister Elena Salgado said European financing is available if Portugal asks for aid, but ruled out the possibility of Spain making a bilateral loan at this time.

The caretaker administration has said it will resist any bailout or a loan as they would impose tough conditions on the country. It has also said that as a caretaker administration it lacks the power and legitimacy to seek outside help -- a point hotly disputed by opposition politicians.

Lisbon's partners are anxious lest the financing problems reach a point of no return before a new government is in place, sapping confidence in the euro zone, but they cannot force Prime Minister Jose Socrates' hand.

"The situation is in the hands of the Portuguese government... it has to prove to its creditors that it is taking the right steps," IMF Managing Director Dominique Strauss-Kahn told Spanish daily El Pais on Wednesday.

Two business newspapers said the public social security fund has been selling overseas financial assets in the last few days to help finance the state by buying sovereign debt at auctions. Still, a Labour Ministry spokesman said the fund did not buy any treasury bills at Wednesday's auction.

Portugal's benchmark 10-year bond yield that hit a euro lifetime high of 9.06 percent earlier on Wednesday retreated sharply later, following Irish bond yields lower to end at 8.79 percent. But analysts said nothing has changed in their perception of Portugal.

They say the high yields are unsustainable. The fall in the value of the bonds also undermines its banks, who have been substantial buyers of government debt.

Portugal has to repay over 4.2 billion euros in maturing bonds on April 15, and then another 4.9 billion euros in June. Including coupon payments and deficit financing, its requirements until June are put at 12 to 15 billion euros.

"From the pure cash perspective, April should be OK, even with coupons and deficit financing, but then if the domestic bid disappears, there's not much room for maneuver," said David Schnautz, debt strategist at Commerzbank.

(Additional reporting by Shrikesh Laxmidas, Sergio Goncalves, Filipa Lima and Elisabete Tavares, writing by Axel Bugge, editing by Michael Roddy)

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Portugal Seeks EU Aid After Trying ‘Everything’ to Ease Crisis

April 07, 2011, 11:10 AM EDT By Joao Lima, Jim Silver and Anabela Reis

(Updates with comment from Fitch Ratings in seventh paragraph, more comments from Silva Pereira in ninth.)

April 7 (Bloomberg) -- Portugal is set to start hammering out a bailout package that may total 75 billion euros ($107 billion) as it becomes the third euro-region country to seek European Union aid.

The Portuguese government will make a formal aid request to the European Commission today, government minister Pedro Silva Pereira said today at a press conference in Lisbon. The request comes as Finance Minister Fernando Teixeira dos Santos travels to Budapest to meet with other officials from the other 16 euro nations near Budapest tomorrow.

Portugal is the latest nation to seek an EU-led bailout after Greece sparked a sovereign-debt crisis that threatened to splinter the euro region a year ago and then engulfed Ireland. The challenge for Teixeira dos Santos will be negotiating an interest rate on bailout loans that doesn’t strangle an economy that’s barely grown in the past decade or spark the public outcry that greeted Ireland’s bailout package in November.

“Clearly the view of the market was that this was inevitable and that it was only a matter of timing even if we still don’t know what the deal will be,” said Julian Callow, chief European economist at Barclays Capital in London.

No Choice

Prime Minister Jose Socrates said last night he had no choice than to seek aid as the country faces 9 billion euros of bond maturities in April and June. The yield on Portugal’s 10- year bonds, which hit a record after Socrates resigned last month and early elections were called, rose 6 basis points to 8.595 percent today. Portugal yesterday sold one-year notes at a yield of 5.9 percent, 200 basis points more than Germany pays for 30-year debt.

The euro weakened 0.2 percent to $1.4299 at 4:00 p.m. in Lisbon today. The difference in yield between that Portuguese 10-year bonds and comparable German bonds widened 6 basis points to 517 basis points today. The cost of insuring Portuguese sovereign debt rose 8 basis points to 562, according to CMA prices for credit-default swaps. The contracts earlier traded as low as 532 basis points.

Fitch Ratings said in a statement today that Portugal’s aid request “will help moderate the near-term risks to macro- economic and financial stability.”

Three Weeks

German Finance Minister Wolfgang Schaeuble said today that it will take two-to-three weeks to assess a request for European aid made by Portugal. Conditions will be attached to any bailout granted, he said in an e-mailed statement.

The conditions and the amount of EU financial aid has not been defined yet, government minister Silva Pereira said at a press conference in Lisbon today.

“What we expect is that this request for financial assistance can provide the immediate response that our economy needs,” the minister said.

Portugal’s package is likely to be worth as much as 75 billion euros, said two European officials with knowledge of the situation. Portugal may pay rates similar to what Greece is being charged for its rescue loans, which were renegotiated last month, Goldman Sachs Group Inc. said in a report to clients.

Greece pays an average of 3.5 percent for the first three years of its plan and 4.5 percent thereafter. Ireland, which is also trying to get lower terms, currently pays an average of 5.8 percent.

Greek Rates

“We would assume that it would be lower, as Greece got a 100 basis point cut in its rate, and Ireland could have gotten something similar if they had played ball on their corporate tax rate,” said Padhraic Garvey, head of developed-market debt at ING Groep NV in Amsterdam.

The Social Democrats, Portugal’s biggest opposition party, would aim for a lower interest rate on the aid program than the rate on the Irish package, Antonio Nogueira Leite, an adviser of the Social Democratic Party, said today in a Bloomberg Television interview. The Social Democrats lead Socrates’ Socialist party in opinion polls, and elections are set for June 5.

The terms of Portugal’s bailout package must be tighter than they otherwise would have been given the political situation caused by the pending elections, Finnish Prime Minister Mari Kiviniemi said.

Portugal will need about 15 billion euros to 20 billion euros to tide it over until the country gets a new government, Swedish Finance Minister Anders Borg said at a press conference in Stockholm today. Sweden is “very far” from having reached a decision on whether it will contribute to a Portuguese bailout, Borg said. Portugal should have acted last autumn to seek financial aid, he said.

Spain

Portugal’s announcement sparked optimism that the worst of Europe’s sovereign debt crisis is over and won’t threaten Spain, the euro region’s fourth-largest economy. The premium investors demand to hold Spanish debt over German bunds rose 2 basis points to 182 basis points today, and has dropped more than 100 basis points from its euro-era record in November.

Spanish Finance Minister Elena Salgado said she “absolutely rules out” contagion from Portugal as “markets absolutely distinguish between the two countries.”

“We do not expect any other EMU sovereign to be in need of financial assistance,” Francesco Garzarelli, Goldman Sachs London-based chief interest-rate strategist, in a report to clients.

At the same time, the euro region is still threatened by the risk that countries receiving aid won’t be able to tame their deficits and may be forced to restructure debt.

Restructuring Risk

“The urgent question still remains whether sovereign debt will have to be restructured, particularly in the case of Greece,” said Torge Middendorf, an economist at WestLB in Dusseldorf. “Should there indeed be a restructuring, Germany’s banks would be hit particularly hard.”

At 12.7 percent, Greek 10-year bond yields are almost 390 basis points higher than last April before the country received bailout funds. Standard & Poor’s Ratings Services said last week Greece may have to restructure its debt as “there are growing risks to the sovereign’s budgetary position.”

European governments will also be facing higher interest rates after the European Central Bank raised its benchmark rate a quarter point to 1.25 percent, the first increase since 2008.

The ECB has already suspended collateral conditions for all securities guaranteed by the Greek and Irish governments and Portuguese banks have been virtually cut off from interbank markets. The ECB had “encouraged” Portugal to seek EU aid, ECB President Jean-Claude Trichet said at a press conference in Frankfurt today.

Banks Gain

Banks led the gains on Portugal’s benchmark PSI-20 Index today, with Banco Espirito Santo SA adding 5.1 percent to 3.016 euros and Banco Comercial Portugues SA advancing 3.9 percent to 61.3 euro cents.

Portugal’s bond yields surged to records this month after Socrates resigned on March 23 when parliament rejected new austerity measures that aimed to bring the euro region’s fourth largest budget deficit within the EU’s limit of 3 percent of gross domestic product next year.

Portugal reported a 2010 budget deficit last week equal to 8.6 percent of gross domestic product, higher than the 7.3 percent the government had previously forecast, after a change in EU accounting rules forced it to add more than 2 billion euros in charges to last year’s accounts.

--With assistance from James G. Neuger in Brussels, Emma Ross- Thomas in Madrid, Kevin Costelloe and Sandrine Rastello in Washington, Dan Tilles in London, Tony Czuczka, Alan Crawford and Rainer Buergin in Berlin and Susan Li in Hong Kong. Editors: John Fraher, Andrew Davis

To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net; Jim Silver in Lisbon at jsilver@bloomberg.net; Anabela Reis in Lisbon at areis1@bloomberg.net.

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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Portugal seeks bailout, Europe debt crisis spreads

17 hours ago

By BARRY HATTON and ALAN CLENDENNING
Associated Press

(AP:LISBON, Portugal) Portugal asked for a bailout Wednesday to relieve its crushing debt, joining Greece and Ireland by becoming the third European nation to ask for outside help amid a bruising European financial crisis.

Prime Minister Jose Socrates went on national television to announce that Portugal must take international assistance to save its rapidly deteriorating economy, after months of insisting that he would do everything possible to avoid a bailout.

Socrates said his caretaker government asked "for financial help, to ensure financing for our country, for our financial system and for our economy."

He did not say how much Portugal would seek, but analysts have predicted Portugal will need up to euro80 billion ($114 billion). That amount is bearable for Europe's finances unless other nations _ notably Spain _ end up asking for help.

Portugal urgently needs the rescue because has been forced to pay increasingly unsustainable interest rates to persuade investors to buy its debt. Banks from Spain to Germany are heavily exposed to the possibility of a Portuguese default, which would threaten the very existence of the eurozone.

But experts believe a package to save Portugal will be crafted by the European Union and the International Monetary Fund, and European Commission President Jose Manuel Barroso said in a statement the Portugal's request "will be processed in the swiftest possible manner."

The IMF said in a statement Wednesday night that it had not yet received a request for financial assistance from Portugal, but added that "we stand ready to assist Portugal."

Portugal has one of the 17-nation eurozone's smallest and weakest economies and has struggled for months to finance its economy amid investor fears that it is incapable of settling its debts.

Socrates announced his resignation two weeks ago after opposition parties refused to accept additional austerity measures he proposed to stave off a bailout, but he agreed to stay on as a caretaker leader until the nation holds new elections in June.

There was confusion over whether he could ask for a bailout in his current post because of doubts whether Portugal's constitution permitted an interim leader from doing so, but Socrates said in his speech that he hoped opposition party leaders would support his decision.

"This is an especially grave moment for our country," he said. "And things will only get worse if nothing's done."

Other European nations have been urging Portugal for months to accept outside help in a bid to contain the continent's debt crisis from spreading to other European nations, amid market fears that the eurozone itself could break apart if it didn't.

The biggest risk for investors is Spain, which has the zone's fourth largest economy and could be too big to bail out. Economic conditions in Spain are especially grim _ with one out of every Spaniards out of work _ but analysts generally agree that the government has recently put in place enough austerity measures to prevent the country from becoming another bailout victim.

Portugal insisted for nearly a year that it would not seek outside assistance because terms of a bailout would lock it into austerity measures like tax raises and wage cuts for years. And that, Socrates and other said, would further lower the standard of living in a nation already hurting with high unemployment and few job prospects for a young and highly educated work force.

Greece and Ireland faced the same difficult situation, but ended up asking for bailouts when it became clear they had no choice.

Portugal' economic troubles differ from Ireland, where banks became over- leveraged because of a real estate boom that went bust, and Greece, where government officials lied about the nation's financial health.

Portugal's troubles are rooted in a decade of measly growth averaging only 0.7 percent a year while it simultaneously amassed huge debts to finance social programs and government expenses to give the Portuguese benefits similar to their richer European neighbors.

Investor were not convinced that the moves were sustainable, and their fears amplified over the last six months as buyers of Portuguese bonds increasingly demanded higher returns to buy the nation's debt

The yield on Portugal's 10-year bonds hit 8.54 percent Wednesday before Socrates made the bailout announcement, up from 5.8 percent a year ago.

The higher yields are unsustainable, especially because Portugal is expected to enter a double-dip recession this year.

The resignation of Socrates' government left the nation without a fully operating administration, amplifying market fears. Two ratings agencies subsequently downgraded Portugal's bonds to just one notch above junk level in recent days, triggering widespread alarm across Europe.

Socrates blamed opposition parties for forcing him to make the bailout request because they rejected a fresh round of austerity cuts endorsed by European Commission and European Central Bank. He had been seeking a new round of tax hikes along with pay and welfare programs cuts, and had promised he would quit if they were not approved.

Portugal managed to raise about euro1 billion ($1.43 billion) in a Treasury bill sale Wednesday before Socrates made the bailout announcement, but investors demanded record interest rates.

Portugal's short-term borrowing rates then rose above what it would likely have to pay for bailout loans as the yield on five-year bonds on the secondary market hit 10 percent. In contrast, Irish average interest rates _ currently under review for a decrease _ stand at 5.8 percent for loans with longer maturities.

Analysts believe Portugal probably has enough money in reserve to repay a euro4.5 billion ($6. billion) loan that falls due later this month, but predict it would be extremely difficult for the nation to find almost euro7 billion ($10 billion) to roll over and make interest payments in June.

On top of that, Portugal still needs to collect funds to keep the country running.

The bailout request came as Portugal's biggest banks announced they will no longer buy national debt as they deal with their own liquidity problems amid heavy assistance from the European Central Bank.

Amid tightened financing, predictions abound that Portuguese companies may face difficulties making their payrolls. And Portugal's unemployment rate last year reached a record 11.2 percent, with gloomy prospects of any relief for job seekers.

Across the border in Spain, Prime Minister Jose Luis Rodriguez Zapatero announced last weekend that he would not seek a third term next year as Spain's financial problems deepen, but said he made the decision in keeping with his decision years ago that two four-year terms were enough.

Spain's leading opposition party renewed its call for immediate special elections because of the country's troubled economy, with more than 20 percent unemployment that is the eurozone's worst jobless rate.

___

Clendenning reported from Madrid.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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Portugal seeks new govt amid debt crisis

LISBON, Portugal – Portugal's president sought to broker a deal between rival parties Friday to give the debt-stressed country a new government as it is engulfed by a financial crisis and edges toward an unwanted bailout.

President Anibal Cavaco Silva, largely a figurehead, was asking parties during a series of meetings whether they would voluntarily form a coalition government — which would remove the need for an early election — or if they preferred a ballot.

Portugal is rudderless and at the mercy of financial markets after the Socialist government quit Wednesday when the opposition refused to back its new austerity measures. The former government had been strenuously resisting market pressures for a bailout but June is likely to bring a financing crunch that could force Portugal to ask for a rescue package.

Officials from three smaller parties who went to the president's riverside "pink palace" Friday all said they preferred early elections in early June. The two largest parties, the center-left Socialists and center-right Social Democrats, were widely expected to follow suit later in the day.

That would likely defer any bailout request to the European Union and the International Monetary Fund until early summer, after the election puts a new government in place.

That sets up a problem, because the outgoing government says Portugal has enough cash to meet a euro4.5 billion ($6.4 billion) bond repayment next month, but there is uncertainty about whether it will have enough for a euro4.9 billion ($6.9 billion) debt due in June.

Portugal is one of western Europe's poorest countries. A decade of anemic growth during which Portugal ran up high debts has spooked markets, sending its borrowing costs higher and hastening its economic decline. Though Europe's bailout fund is able to come up with the about euro75 billion that analysts estimate Portugal may need, the country's woes have contributed to investor fears about the 17-nation eurozone's financial soundness.

Before Cavaco Silva can set an election date, he must consult political parties and also confer — probably next week — with the Council of State advisory panel.

Neither of the country's two dominant parties want to ask for outside financial help like Greece and Ireland, two other eurozone countries, were forced to accept last year. Governments are reluctant to accept bailouts because they lock the country into tight fiscal policies for years and lower living standards.

"Portugal doesn't need any help," outgoing Socialist Prime Minister Jose Socrates said Friday, insisting that his own policy of tax hikes and pay cuts would reduce the country's high debt burden and restore investor faith.

"I know what (a bailout) would mean. I know what it meant for the Greeks and the Irish and I don't want that for my country," he said at a European summit in Brussels.

Portugal's budget deficit hit a record 9.3 percent of gross domestic product in 2009. That was the fourth-highest level in the eurozone and alarmed markets which have made Portugal pay unsustainably high interest rates for what are viewed as risky loans.

Socrates says his latest austerity plan — which opposition parties rejected — would drive the deficit down to 4.6 percent this year.

The Social Democratic Party agrees on the need for deficit-cutting measures but said the government's latest package went too far.

Even without assistance, austerity measures are likely to remain in place for years, choking one of the eurozone's smallest and feeblest economies and deepening public anger. A 24-hour train strike Friday shut down the national rail network — the latest action by disgruntled public employees.

The government's downfall after a year of austerity measures aimed at averting a bailout sent Portugal into a financial tailspin. The fiscal problems coincide with a forecast double-dip recession this year and a record jobless rate of 11.2 percent.

Two rating agencies — Fitch and Standard & Poor's — on Thursday cut their assessment of the country's credit worthiness. The downgrades contributed to deteriorating market conditions for Portuguese debt, and the interest rate on its 10-year bonds surged to a new high of 7.8 percent Friday.

The bond yield is not an automatic increase in Portugal's borrowing costs, but indicates the rate the government would have to pay investors for a 10-year loan if it raised the money today. But the record rates showed market confidence was souring, threatening to effectively block the country out of capital markets, as has happened for Greece and Ireland.

Portugal got better news from rating agency Moody's. Although it downgraded Portugal's credit rating last week, Moody's said it was not considering a further cut because the country's two main parties agree on the need for fiscal consolidation, even if they differ on how to achieve it.

An opinion poll published Friday by Diario Economico newspaper indicated the main opposition party, the Social Democrats, would collect 46.7 percent of the vote in an election compared with just 24.5 percent for the Socialists.

The poll, by Marktest, was based on 805 telephone interviews between March 18-23. Its margin of error was 3.45 percent.

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Portugal sets snap election as crisis deepens

Portugal's President Aníbal Cavaco Silva dissolved parliament yesterday (31 March) and set a snap general election for 5 June, warning that the next government faced an "unprecedented economic crisis".

Portugal’s Prime Minister José Socrates resigned last week and warned of grave consequences for the country after parliament rejected his government's latest austerity measures, aimed at avoiding a bailout.

After Greece and Ireland received EU-IMF bailouts last year to cope with their swollen public debts and deficits, Portugal is seen as the next candidate for a rescue despite efforts to put its public finances in order. Spain may follow after that.

The EU has discussed a rescue plan for Portugal but it is dependent on Lisbon asking for the aid and making an official request to both the EU and the International Monetary Fund.

In the meantime, Ireland said its banks needed 24 billion euros in extra capital, shaking eurozone markets and deepening the bloc's sovereign debt crisis.

President Aníbal Cavaco Silva's decision came as the country faces acute economic challenges that threaten to push it to follow Greece and Ireland in seeking a bailout from the European Union and International Monetary Fund.

Prime Minister José Socrates resigned last week after the opposition rejected his government's austerity measures, prompting downgrades by rating agencies, pushing bond yields to new euro-era highs and raising pressure on the country to ask for a bailout.

"I took the decision to call a general election given the clear degradation of the political situation, shown by the growing difficulty of the minority government and the opposition in agreeing on measures to overcome the economic and social problems Portugal faces," the president said.

The economic challenges mounted on Thursday as the country missed its budget deficit goal for 2010.

"The next government will face an unprecedented economic and financial crisis," the president said. "The country's difficulties are so deep that nobody can have the illusion that they will disappear from one day to another."

All opposition parties and the ruling Socialists had urged Cavaco Silva to call elections as soon as possible, the president said.

The opposition had rejected the idea of a coalition cabinet to avoid an election, and has also ruled out pre-election alliances, highlighting a dramatic increase in polarisation and antagonism among the parties.

The main opposition, the centre-right Social Democrats, lead in opinion polls and believe they can win a majority in parliament. Only one minority government has completed its full term since Portugal's decades-long dictatorship ended in 1974.

President says commitments have to be met

Socrates' government will remain in power until the election in a caretaker capacity with limited powers. Finance Minister Fernando Teixeira dos Santos said on Thursday that the caretaker government would not have the powers to seek a bailout.

The president, whose influence is likely to increase until a new government is elected, said the country has to ensure "the financing means necessary for the economy to function".

"The state has to meet its commitments and nobody should avoid doing what has to be done to protect our future," he said.

Cavaco Silva urged all parties to cooperate on this matter. Social Democrat leader Pedro Passos Coelho told Reuters last week he did not rule out a possible bridging loan if financing conditions become acute before the election.

Economists have focused on two large Portuguese bond redemptions in coming months. Most of them say the country has raised enough funds this so far this year to be able to repay around four billion euros in April.

The National Statistics Institute said on Thursday that the country's budget deficit reached 8.6% of gross domestic product in 2010, above a target of 7.3% agreed with Brussels. The news sent yields up sharply to new euro lifetime highs.

Socrates insists the country can do without a foreign aid package.

(EurActiv with Reuters.)

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Portugal to hold June elections

irishtimes.com - Last Updated: Thursday, March 31, 2011, 21:30

Portugal's president dissolved parliament today and set a snap general election for June 5th, warning the next government faced an "unprecedented economic crisis."

President Anibal Cavaco Silva's decision came as the country faces acute economic challenges that threaten to push it to follow Greece and Ireland in seeking a bailout from the European Union and International Monetary Fund.

Prime minister Jose Socrates resigned last week after the opposition rejected his government's austerity measures, prompting downgrades by rating agencies, pushing bond yields to new euro-era highs and raising pressure on the country to ask for a bailout.

"I took the decision to call a general election given the clear degradation of the political situation, shown by the growing difficulty of the minority government and the opposition in agreeing on measures to overcome the economic and social problems Portugal faces," the president said.

The economic challenges mounted on Thursday as the country missed its budget deficit goal for 2010.

"The next government will face an unprecedented economic and financial crisis," the president said. "The country's difficulties are so deep that nobody can have the illusion that they will disappear from one day to another."

All opposition parties and the ruling Socialists urged Cavaco Silva to call elections as soon as possible, the president said.

He made the decision to set the election after meeting the advisory council of state, made up of 19 senior political figures including Socrates, earlier on Thursday.

The opposition had rejected the idea of a coalition cabinet to avoid an election, and have also ruled out pre-election alliances, highlighting a dramatic increase in polarization and antagonism among the parties.

Socrates' government will remain in power until the election in a caretaker capacity with limited powers. Finance minister Fernando Teixeira dos Santos said earlier the caretaker government would not have the powers to seek a bailout.

The National Statistics Institute said today the country's budget deficit reached 8.6 per cent of gross domestic product in 2010, above a target of 7.3 per cent agreed with Brussels. The news sent yields up sharply to new euro lifetime highs.

Economists have focused on two large Portuguese bond redemptions in coming months. Most of them say the country has raised enough funds this so far this year to be able to repay around €4 billion in April.

Socrates insists the country can do without a bailout, but the leader of the main opposition Social Democrats told Reuters that his party, which leads in opinion polls, would consider supporting a request for a bridging loan if the financial crisis escalates.

Reuters 

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Portugal calls election amid economic crisis

Reuters

Portugal President Anibal Cavaco Silva attends a news conference at the Belen Palace in Lisbon. Silva on Thursday dissolved Parliament and set a snap election for June 5 following the resignation of the minority Socialist government of Prime Minister Jose Socrates.

Lisbon - Portugal's president dissolved Parliament on Thursday and set a snap general election for June 5, warning the next government faced an “unprecedented economic crisis”.

President Anibal Cavaco Silva's decision came as the country faces acute economic challenges that threaten to push it to follow Greece and Ireland in seeking a bailout from the European Union and International Monetary Fund.

Prime Minister Jose Socrates resigned last week after the opposition rejected his government's austerity measures, prompting downgrades by rating agencies, pushing bond yields to new euro-era highs and raising pressure on the country to ask for a bailout.

“I took the decision to call a general election given the clear degradation of the political situation, shown by the growing difficulty of the minority government and the opposition in agreeing on measures to overcome the economic and social problems Portugal faces,” the president said.

The economic challenges mounted on Thursday as the country missed its budget deficit goal for 2010.

“The next government will face an unprecedented economic and financial crisis,” the president said. “The country's difficulties are so deep that nobody can have the illusion that they will disappear from one day to another.”

All opposition parties and the ruling Socialists urged Cavaco Silva to call elections as soon as possible, the president said.

He made the decision to set the election after meeting the advisory council of state, made up of 19 senior political figures including Socrates, earlier on Thursday.

The opposition had rejected the idea of a coalition cabinet to avoid an election, and have also ruled out pre-election alliances, highlighting a dramatic increase in polarisation and antagonism among the parties.

Socrates' government will remain in power until the election in a caretaker capacity with limited powers. Finance Minister Fernando Teixeira dos Santos said earlier the caretaker government would not have the powers to seek a bailout.

The National Statistics Institute said Thursday the country's budget deficit reached 8.6 percent of gross domestic product in 2010, above a target of 7.3 percent agreed with Brussels. The news sent yields up sharply to new euro lifetime highs.

Economists have focused on two large Portuguese bond redemptions in coming months. Most of them say the country has raised enough funds this so far this year to be able to repay around 4 billion euros in April.

Socrates insists the country can do without a bailout, but the leader of the main opposition Social Democrats told Reuters that his party, which leads in opinion polls, would consider supporting a request for a bridging loan if the financial crisis escalates. - Reuters

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Portugal seeks political deal amid debt crisis

LISBON, Portugal—Portugal's political parties opted Friday to hold an early election rather than form a new government, even though that could hasten the debt-stressed nation's financial woes and force it to take a bailout.

Portugal is rudderless and at the mercy of nervous financial markets after the Socialist government quit earlier this week in a dispute with rivals over new austerity measures.

President Anibal Cavaco Silva, who is largely a figurehead but oversees election procedures, met Friday with all the country's political parties to see if they would voluntarily form a coalition government. But all backed a new election instead, which would take place in late May or early June.

Portugal, one of western Europe's poorest countries, is being engulfed by a financial crisis that is pushing it toward a bailout it doesn't want.

A decade of anemic growth during which Portugal ran up high debts has spooked the markets, sending its borrowing costs to unsustainably high levels. Although Europe's bailout fund is able to come up with the euro75 billion that analysts estimate Portugal may need, its problems have contributed to investor fears about the entire 17-nation eurozone's financial soundness.

The parties' decisions Friday means that bailout request to the European Union and the International Monetary Fund will be deferred until early summer, after the election.

That might set up a cash-flow problem. The outgoing government says Portugal has enough cash to meet a euro4.5 billion ($6.4 billion) bond repayment next month, but there is uncertainty about whether it will have enough for a euro4.9 billion ($6.9 billion) debt due in June.

Barclays Capital said Portugal's funding was tight but the June repayment doesn't spell disaster. "In our opinion, Portugal is likely to find financing, but it is not in a comfortable position," it said.

Neither of Portugal's two dominant parties want to ask for outside financial help like Greece and Ireland, the two other eurozone countries that were forced to accept bailouts last year, due to fears that they would be locked into tight fiscal policies and lower living standards for years.

"Portugal doesn't need any help," outgoing Socialist Prime Minister Jose Socrates said Friday, insisting that his own policy of tax hikes and pay cuts would reduce the country's high debt burden and restore investor faith.

"I know what (a bailout) would mean. I know what it meant for the Greeks and the Irish and I don't want that for my country," he said at a European summit in Brussels.

Socrates says his latest austerity plan -- which opposition parties rejected -- would drive the deficit down to 4.6 percent this year. The opposition Social Democratic Party agrees on the need for deficit-cutting measures but said the government's latest package went too far.

Even without assistance, austerity measures are likely to remain in place for years, choking one of the eurozone's smallest and feeblest economies and deepening public anger. A 24-hour train strike Friday shut down the national rail network -- the latest action by disgruntled public employees.

The government's downfall after a year of austerity measures aimed at averting a bailout sent Portugal into a financial tailspin. The fiscal problems coincide with a forecast double-dip recession this year and a record jobless rate of 11.2 percent.

An opinion poll published Friday by Diario Economico newspaper indicated the main opposition party, the Social Democrats, would collect 46.7 percent of the vote in an election compared with just 24.5 percent for the Socialists.

The poll, by Marktest, was based on 805 telephone interviews between March 18-23. Its margin of error was 3.45 percent.

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Portugal seeks new govt amid debt crisis

Barry Hatton, Associated Press, On Friday March 25, 2011, 3:29 pm EDT

LISBON, Portugal (AP) -- Portugal's political parties opted Friday to hold an early election rather than form a new government, even though that could hasten the debt-stressed nation's financial woes and force it to take a bailout.

Portugal is rudderless and at the mercy of nervous financial markets after the Socialist government quit earlier this week in a dispute with rivals over new austerity measures.

President Anibal Cavaco Silva, who is largely a figurehead but oversees election procedures, met Friday with all the country's political parties to see if they would voluntarily form a coalition government. But all backed a new election instead, which would take place in late May or early June.

Portugal, one of western Europe's poorest countries, is being engulfed by a financial crisis that is pushing it toward a bailout it doesn't want.

A decade of anemic growth during which Portugal ran up high debts has spooked the markets, sending its borrowing costs to unsustainably high levels. Although Europe's bailout fund is able to come up with the euro75 billion that analysts estimate Portugal may need, its problems have contributed to investor fears about the entire 17-nation eurozone's financial soundness.

The parties' decisions Friday means that bailout request to the European Union and the International Monetary Fund will be deferred until early summer, after the election.

That might set up a cash-flow problem. The outgoing government says Portugal has enough cash to meet a euro4.5 billion ($6.4 billion) bond repayment next month, but there is uncertainty about whether it will have enough for a euro4.9 billion ($6.9 billion) debt due in June.

Barclays Capital said Portugal's funding was tight but the June repayment doesn't spell disaster. "In our opinion, Portugal is likely to find financing, but it is not in a comfortable position," it said.

Neither of Portugal's two dominant parties want to ask for outside financial help like Greece and Ireland, the two other eurozone countries that were forced to accept bailouts last year, due to fears that they would be locked into tight fiscal policies and lower living standards for years.

"Portugal doesn't need any help," outgoing Socialist Prime Minister Jose Socrates said Friday, insisting that his own policy of tax hikes and pay cuts would reduce the country's high debt burden and restore investor faith.

"I know what (a bailout) would mean. I know what it meant for the Greeks and the Irish and I don't want that for my country," he said at a European summit in Brussels.

Socrates says his latest austerity plan -- which opposition parties rejected -- would drive the deficit down to 4.6 percent this year. The opposition Social Democratic Party agrees on the need for deficit-cutting measures but said the government's latest package went too far.

Even without assistance, austerity measures are likely to remain in place for years, choking one of the eurozone's smallest and feeblest economies and deepening public anger. A 24-hour train strike Friday shut down the national rail network -- the latest action by disgruntled public employees.

The government's downfall after a year of austerity measures aimed at averting a bailout sent Portugal into a financial tailspin. The fiscal problems coincide with a forecast double-dip recession this year and a record jobless rate of 11.2 percent.

An opinion poll published Friday by Diario Economico newspaper indicated the main opposition party, the Social Democrats, would collect 46.7 percent of the vote in an election compared with just 24.5 percent for the Socialists.

The poll, by Marktest, was based on 805 telephone interviews between March 18-23. Its margin of error was 3.45 percent.

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Portugal, Spain become market target after Ireland

By BARRY HATTON and ALAN CLENDENNING, Associated Press, Tuesday, November 23, 2010 at 4:01 a.m.

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Brokers look at the main screen at the Stock Exchange in Madrid Tuesday Nov. 23, 2010. Spain's borrowing costs have soared in a sale of 3- and 6-month bills amid fears the country could be affected by contagion from Ireland's debt crisis.The central bank says the treasury was obliged to pay 1.7 percent in average interest to sell euro2.1 billion ($2.87 billion) in 3-month bills, nearly double the 0.95 percent rate paid in the last such auction Oct. 26. The auction Tuesday came as Madrid's Ibex 35 bourse dipped for the second day in a row amid concerns over Spain's ability to handle its debt in the wake of European Union's bailout of Ireland. Spain's economy is struggling to emerge from nearly two years of recession. (AP Photo/Paul White)

- AP

People walk past a poster with the words "General Strike it's not one right. It's many." Tuesday, Nov. 23 2010, in Lisbon. Workers' unions have united in a call for a general strike for Nov. 24 protesting the government's package of austerity measures aimed at controlling the country's current financial crisis. (AP Photo/Armando Franca)

- AP

A banner reading: "General strike" and "Against injustices, change policy" hangs from a fence as a ferry bringing commuters across the Tagus river approaches Lisbon Tuesday, Nov. 23 2010. Workers' unions have united in a call for a general strike for Nov. 24 protesting the government's package of austerity measures aimed at controlling the country's current financial crisis. (AP Photo/Armando Franca)

- AP

Commuters arrive in Lisbon from across the Tagus river Tuesday, Nov. 23 2010. Workers' unions have united in a call for a general strike for Nov. 24 that is expected to bring public transport to a halt. As the government struggles to cope with the current international financial crisis discontent with its austerity measures is on the rise among the Portuguese. (AP Photo/Armando Franca)

- AP

A homeless sleeps in front of a pawn shop on Monday, Nov. 22, 2010 in downtown Lisbon. Portugal is widely viewed as the eurozone's weakest member after Ireland and Greece as its high debt burden suggests growth will be weak for years. As Ireland prepares to receive a bailout, the Portuguese are preparing for the market spotlight to focus on them but Prime Minister Jose Socrates told reporters Monday that Portugal "doesn't need anybody's help." (AP Photo/ Francisco Seco)

LISBON, Portugal — Europe's efforts to contain its debt crisis came under increasing strain Tuesday as bond market jitters shook Portugal and Spain, seen as the 16-nation eurozone's next weakest links now that Ireland has followed Greece by accepting a massive international rescue.

The nations' borrowing costs rose, suggesting investors are more worried about default, while Spain limited the size of a bond sale because traders demanded sharply higher premiums.

Stock traders panicked and dumped shares across all sectors, sending Portugal's benchmark stock index down 2.2 percent by the close, while Spain's sank 3.1 percent to a level not seen since July. The euro slid below $1.34 for the first time in two months.

Spooked by the scale of Greece's bailout requirements in May and Ireland's banking failures, international investors are looking much closer at the public finances of eurozone countries and they don't like what they're seeing, particularly in Portugal.

Traders are "looking for their next target" and Portugal fits the bill, said Emilie Gay, an analyst at Capital Economics in London. She predicts Portugal will have to ask for help by early next year, when it has to begin refinancing billions of euros (dollars) in government bonds. A bailout for Portugal would cost at least euro50 billion, according to Capital Economics.

European Union President Herman Van Rompuy insisted Portugal's finances are sound because the country's banks are well capitalized, they haven't had to cope with a severe housing market bubble, and the government has a strong program to bring the deficit down.

Asked during a visit to Stockholm whether the Irish bailout package was big enough and whether it can prevent the crisis spreading, Van Rompuy said "there is no need for help in Portugal and of course the safety net is big enough to support Ireland."

Portugal accounts for less than 2 percent of the eurozone's total economy but a potential bailout would crank up pressure on Spain, the European Union's fourth-largest economy, and entail possibly dramatic repercussions for the entire bloc.

Analysts at Capital Economics described the risk of a Spanish bailout as "fairly low" but warned that "the cost would be devastatingly high."

"This threat is therefore closely linked to the risk of some form of eurozone breakup, stemming either from Spain being forced to leave and default or perhaps even from Germany jumping ship," the analysts said in a report to investors Tuesday.

Ireland's decision to accept a loan to prop up its banks, which may reach euro100 billion ($136 billion), and make sharp budget cuts has come just six months after the EU and IMF provided a similar sum for Greece.

Greece, meanwhile, is still grappling with its promised reforms and must make an extra effort to meet next year's deficit targets, its international donors said Tuesday.

The establishment of a euro750 billion ($1.05 trillion) safety net, following Greece's bailout, for any other eurozone members facing the risk of imminent loan defaults has done little to quell market fears.

Portugal's recent public finance figures have sharpened concerns' about its ability to handle its debt load. Public spending rose 2.8 percent in the first 10 months of the year compared with a year earlier. Crucially, higher interest payments on its loans outweighed an increase in tax revenue, suggesting the weight of existing debt may be unsustainable as it offsets any progress in public finances.

The interest rate on 10-year Portuguese bonds rose to 6.9 percent Tuesday from 6.8 percent the previous day. That was close to the record 7 percent breached earlier this month.

Ever since Greece's bailout, Portugal was considered a risk because of its meager economic growth and high debt. It has borrowed huge amounts to finance sacred welfare entitlements and private spending - while protecting jobs through outdated labor laws that make it difficult to hire and fire workers. Its industry has also broadly failed to move with the times.

Spain, though much larger than Portugal, is also feeling the heat of the market spotlight. Its borrowing costs soared Tuesday in a sale of 3- and 6-month bills and the government declined to sell as much of the debt as initially planned because of the higher rate.

The central bank says the treasury was obliged to pay 1.7 percent in average interest to sell euro2.1 billion ($2.87 billion) in 3-month bills, nearly double the 0.95 percent rate paid in the last such auction in October. The rate for the sale of euro1.2 billion in 6-month bills jumped to 2.1 percent from 1.3 percent.

The difference between 10-year Spanish bonds and the equivalent benchmark German bund rose nearly 15 basis points to around 2.32 percentage points in midafternoon trading. That equals a record set in June, right before the results of stress tests on European banks were released.

Spanish Central Bank governor Miguel Angel Fernandez Ordonez said the effects of the Irish crisis had "spread rapidly to periphery" countries.

He said Spain's fiscal consolidation program "is not without risks" and warned the government against straying off course.

Spain is struggling to emerge from nearly two years of recession. Third-quarter growth was flat, after two quarters of timid expansion and unemployment is at a eurozone high of 19.8 percent.

The government has enforced austerity measures including a freeze on pensions and a cut in civil service wages by an average of five percent.

The 2011 budget foresees cutting the deficit from an expected 9.3 percent of GDP this year to 6.0 percent in 2011. Last year it stood at 11.2 percent of GDP.

Portugal, which last year had the fourth-highest deficit in the eurozone after Greece, Ireland and Spain, is also readying an austerity package, featuring tax hikes and pay cuts, for introduction Jan. 1. Parliament is due to approve the measures on Friday.

However Portugal, like other European countries, is facing a popular backlash against its cuts. A national 24-hour strike Wednesday is expected to bring the biggest shutdown in public services in over 20 years.

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Alan Clendenning reported from Madrid. Daniel Woolls and Ciaran Giles contributed from Madrid, Elena Becatoros from Athens, Shawn Pogatchnik from Dublin, and Louise Nordstrom from Stockholm.

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