Portugal Told to Make Deeper Deficit Cuts to Gain $116 Billion EU Bailout

Europe’s wealthy countries looked to Portugal to resolve the year-old euro debt crisis by coming up with “sustainable” deficit cuts to pave the way to an 80 billion-euro ($116 billion) bailout.

Confident that Portugal will be the last aid seeker, German Finance Minister Wolfgang Schaeuble pushed the feuding political parties in Lisbon to unite behind an austerity package in the thick of an election campaign.

“It’s up to Portugal to decide,” Schaeuble told reporters today at a meeting of European finance officials in Godollo, Hungary. Portugal “has to deliver sustainable measures for reducing the deficit.”

Bond markets reflected optimism that Spain will escape the turmoil, while speculation mounted that Greece might need further help to deal with the billowing debt that triggered the crisis last year.

Finance ministers agreed yesterday to send European Commission, European Central Bank and International Monetary Fund officials to Lisbon next week to start negotiations over the package, with the goal of wrapping it up on May 16, three weeks before Portugal’s June 5 election.

Portugal’s bond yields surged to euro-era highs after the opposition party balked on March 23 at a program of additional savings of 4.5 percent of gross domestic product over three years, leading Prime Minister Jose Socrates to step down and prompting downgrades in the country’s credit rating.

Photographer: Henrik Kettunen/Bloomberg

Finland's Finance Minister Jyrki Katainen. Close

Finland's Finance Minister Jyrki Katainen.

Close
Open
Photographer: Henrik Kettunen/Bloomberg

Finland's Finance Minister Jyrki Katainen.

Extra Yield

Yesterday’s European pledge failed to buoy the Portuguese market. Ten-year yields rose 5 basis points to 8.66 percent, leaving the extra yield over German bonds at 518 basis points.

Europe’s effort to return to fiscal health is also dogged by the threat of higher borrowing costs after the ECB this week lifted its main interest rate for the first time in almost three years.

In a sign of how Portugal has surrendered control of its fate, the European Union will intrude on the political campaign by trying to broker a cross-party budget-cutting deal between Socrates and the opposition party led by Pedro Passos Coelho.

Anibal Cavaco Silva, the largely ceremonial Portuguese president, said he will play a role in forging an initial accord on an economic overhaul that will be followed up by the future government.

Interim Program

“What we need now is an interim program so the next government can participate in the final negotiations because it is the next government that is going to implement the program,” Cavaco Silva told reporters at a separate event in Budapest today.

Both parties “are sticking to the general budgetary objectives” of shaving the deficit to 4.6 percent of GDP this year, 3 percent in 2012 and 2 percent in 2013, Luxembourg Prime Minister Jean-Claude Juncker said.

“Discussing deeply unpopular measures ahead of elections will not be easy,” Gilles Moec, a London-based economist at Deutsche Bank AG, said in a research note. “Some volatile newsflow is likely to emerge in the next few days from Lisbon.”

In addition to budget cuts and the sale of state assets, Portugal will be pressed to lessen regulations that have helped keep its annual economic growth rate below 1 percent for the past decade, one of Europe’s worst records.

The 80-billion-euro aid estimate is “very, very preliminary,” EU Economic and Monetary Commissioner Olli Rehn said in Godollo. He said Portugal’s loans would be “most likely” for three years, shorter than the 7 1/2-year maturities on joint EU-IMF packages of 110 billion euros for Greece and 67.5 billion euros for Ireland.

‘Move Expeditiously’

As with the first two bailouts, two-thirds of the loans would come from the EU and one-third from the IMF. The Washington-based global lender is “prepared to move expeditiously,” Managing Director Dominique Strauss-Kahn said in a statement yesterday.

“I never write I check before I see the bill,” French Finance Minister Christine Lagarde said. “Work has to be done quickly.”

Politics in the bill-paying countries will also play a role, with German Chancellor Angela Merkel’s popularity suffering and polls showing a surge in support for a euro-skeptic party in Finland’s April 17 elections.

Finnish Finance Minister Jyrki Katainen, a candidate for prime minister, said Portugal must enact deficit cuts that go beyond the measures rejected last month in parliament.

“The package must be really strict because otherwise it doesn’t make any sense,” Katainen said yesterday. “The package must be harder and more comprehensive than the one the parliament voted against.”

Debt Crisis

Finance ministers also took steps to loosen the economic noose around Greece, the country that triggered the debt crisis when it veered toward default a year ago.

Plans to lengthen Greece’s maturities to 7 1/2 years from 3 years were confirmed at the meeting, along with a cut in the average lending rate by 1 percentage point to around 3.5 percent.

Ireland has made less progress in winning a cut in its 5.8 percent aid rate, facing pressure from Germany and France to first lift its 12.5 percent business tax rate, about half the EU average.

Investors are charging Greece 938 basis points more than Germany to borrow for 10 years and Ireland 577 basis points. Spain’s spread has been compressed to 178 basis points from 283 basis points on Nov. 30, a sign of growing confidence in Spain’s financial management.

“I do not see any risk of contagion -- we are totally out of this,” Spanish Finance Minister Elena Salgado said.

To contact the reporters on this story: James G. Neuger in Godollo, Hungary at jneuger@bloomberg.net; Mark Deen in Godollo, Hungary at markdeen@bloomberg.net.

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.