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Portugal Wins Aid, Heightening Euro Backlash Over Bailouts

Portugal Protests
Demonstrators shout slogans and hold banners as they take part in May Day rally in downtown Lisbon on May 1, 2011. In Portugal, tens of thousands marched in protest at austerity measures expected to be imposed under the terms of a European Union and International Monetary Fund bailout plan. Photographer: Patricia de Melo Moreira/AFP/Getty Images

Portugal won a 78 billion-euro ($116 billion) international aid package, fanning domestic controversy over budget cuts amid an election campaign and renewing discontent in Europe’s richer countries over bailouts.

Emergency lending for Portugal lifted the cost of fighting Europe’s debt crisis to 256 billion euros just as speculation mounts that Greece, the country where it started, is plunging into a deeper financial hole.

“I will also be honest: this is not easy, it’s a tough program,” Juergen Kroeger, a European Commission official, told reporters today after the details were hammered out in Lisbon.

Portugal joined Greece and Ireland as beneficiaries of aid, heightening the political backlash in wealthier countries such as Finland and Germany over the costs of keeping the 17-nation euro economy intact.

A year of crisis management “doesn’t work” and “it’s a question of time before a default will happen” in Greece, Timo Soini, head of Finland’s euro-skeptic True Finns party, told Bloomberg Television today.

Soini indicated that the True Finns, which rocketed to third place in last month’s election, can’t stand in the way of Portugal’s package, which follows loans of 110 billion euros for Greece and 67.5 billion euros for Ireland.

Parliamentary Maneuvering

While the party would tolerate parliamentary maneuvering to funnel aid to Portugal, it would use its status in the future Finnish government to oppose a strengthening of the bailout facility, Soini said.

The European Central Bank countered the opponents, with President Jean-Claude Trichet saying Portugal’s program has the “necessary elements to bring about a sustainable stabilization of the Portuguese economy.”

Speaking within walking distance of the True Finns’ headquarters after the ECB traveled to Helsinki for its monthly meeting, Trichet called on “all countries to be up to their responsibility.”

European governments and the International Monetary Fund forced all of Portugal’s main political parties to pledge to slash the budget by 10 percent of gross domestic product over the next three years, no matter who is elected on June 5.

“During that three-year period the economy will face significant headwinds,” the IMF’s Poul Thomsen said at the Lisbon press conference. “That is by any standard ambitious and a strong pace of adjustment.”

Three Years

Euro-area countries will provide two-thirds and the IMF one-third of Portugal’s loans. IMF loans for the first three years will come at a 3.25 percent interest rate. The rate on the European portion will be higher.

Portugal estimated that the economy will shrink about 2 percent in 2011, twice as sharp as the contraction forecast in March. It predicted another 2 percent decline in 2012, tearing up a forecast of 0.3 percent growth.

Portugal’s public workers plan to stage a one-day strike tomorrow, building on May 1 labor-day protests by the country’s main unions against the planned cuts in pensions, unemployment benefits, health care and education.

Portugal’s 10-year bonds fell today, erasing gains made since the start of the week as the aid talks neared climax. The 10-year yield rose 13 basis points to 9.65 percent at 2:35 p.m. in Lisbon, pushing the extra yield over German bonds to 642 basis points.

Emergency Relief

Emergency relief for Portugal inflamed anew the political mood in Germany, which as the euro area’s largest economy is the main guarantor of the unprecedented rescue programs put in place by European governments last year.

Calling for aid during an election campaign is “a slap in the face” to countries that haven’t mismanaged their finances, said Frank Schaeffler, a member of German Chancellor Angela Merkel’s governing coalition.

“Each country has to tap its own reserves before it makes a grab for the reserves of the others,” Schaeffler, a Free Democratic Party member of the German parliament’s finance committee, said in a phone interview. He said Portugal should sell its gold stocks first.

Portugal’s aid package requires approval by all euro-area governments, with most putting it to parliament. Also up for debate is the strengthening of the temporary euro rescue fund and the setup of a permanent fund as of mid-2013.

Merkel declined to pass judgment on the Portuguese package, waiting until European finance ministers discuss it on May 16.

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