European finance chiefs endorsed a 78 billion-euro ($111 billion) bailout for Portugal as they stepped up pressure on Greece to do more to win improved aid terms.
Portugal followed Greece and Ireland in seeking emergency loans from the European Union and the International Monetary Fund, bringing to 256 billion euros the aid provided to stamp out the sovereign debt crisis.
Portugal will receive the first tranche of the loan, 18 billion euros, at the end of the month or beginning of June, Portuguese Finance Minister Fernando Teixeira dos Santos told reporters late yesterday after a meeting in Brussels.
The backing for Portugal came during deliberations clouded by the absence of IMF Managing Director Dominique Strauss-Kahn. Europe’s rich countries tied extra money for Greece to pledges that it deepen spending cuts and reap more revenue from asset sales. They also weighed making bondholders share the pain.
“Greece also has a huge privatization potential and the Greeks should help themselves before calling for more money,” Austrian Finance Minister Maria Fekter said before the meeting.
Euro-area finance ministers also approved the nomination of Bank of Italy Governor Mario Draghi to be the next president of the European Central Bank.
Greek bonds fell after the euro area’s economic powerhouses put up hurdles to an expanded aid package, with public discontent simmering in northern Europe over the costs of propping up high-deficit countries on the continent’s periphery.
Finance ministers said the IMF’s role as the contributor of a third of the bailout money for Greece, Ireland and Portugal won’t be hampered by Strauss-Kahn’s May 14 arrest on sexual-assault charges in New York.
Strauss-Kahn, 62, who has denied the charges, was ordered held without bail by a New York judge. While he didn’t enter a plea yesterday in Manhattan Criminal Court, his lawyer has said he will plead not guilty. The Washington-based IMF was represented in Brussels by Nemat Shafik, a deputy managing director.
IMF loans to Portugal will come at a 3.25 percent interest rate. The rate on the European portion will be between 5.5 percent and 6 percent, EU Monetary Affairs Commissioner Olli Rehn said on May 10.
Cost of Aid
Rehn told reporters late yesterday that the cost will be 215 basis points over “relevant rates” for funds from the European Financial Stabilization Mechanism and a premium of 208 basis points for aid from the European Financial Stability Facility.
Portugal’s dos Santos said today the average interest for the 7 1/2-year program would be around 5.1 percent.
“According to current market conditions, the average rate for the 78 billion-euro loan, involving the IMF and the EU tranches, in the first three years will be around 5 percent and after that the interest rate will rise on average to around 5.2 percent,” he told reporters.
Asked if Portugal will be able to renegotiate the interest rate in the future, he said these were the conditions that were agreed on and that the government “will have to live with.”
“I don’t see, from the discussion we had, that there is room for those conditions to be revised,” dos Santos said.
The three-year plan calls for Portugal to implement the austerity measures that parliament rejected in March. Spending reductions for 2012 and 2013, including cuts to pensions, will amount to 3.4 percent of gross domestic product, while revenue increases will represent 1.7 percent of economic output. The plan also earmarks 12 billion euros for banks.
The package still requires approval by all euro-area governments, with most putting it to parliament.
On Greece, German Finance Minister Wolfgang Schaeuble said there “certainly” won’t be a decision at this meeting, since European and IMF experts have yet to complete an updated assessment of the Greek economy.
Greece, which received a 110 billion-euro loan package last year, is preparing a new economic-recovery program, including 76 billion euros of asset sales and spending cuts, to persuade European governments and the IMF to release the next 12 billion-euro portion in June.
Official creditors in March granted the Athens government more time to repay its current loans, and are considering another extension in order to save Greece from becoming the first euro country to default.
“We are in favor of extending the time period, of giving the Greeks more time, but the tranche can only be paid out if structural reforms are put on track,” Austria’s Fekter said, referring to next month’s disbursement.
Greece needs to slice more out of the budget, the European Commission said on May 13 after forecasting a deficit of 9.5 percent of gross domestic product in 2011, above the 7.4 percent target set when Greece was bailed out last year.
Greece’s debt will balloon to 157.7 percent of GDP in 2011 while the economy slumps for the third year, the forecasts showed, fueling doubts whether the country will generate enough growth to pay its bills.
Plans to offload 50 billion euros of state assets “have top spot on the agenda,” Greek Prime Minister George Papandreou told Italian newspaper Corriere Della Sera on May 14. “We will show that we’re in a position to keep our obligations on the debt.”
Eighty-five percent of international investors surveyed by Bloomberg last week said Greece will probably default on its debt, with majorities predicting the same fate for Ireland and Portugal.
While a debt restructuring -- with options ranging from an extension of maturities to a write-off of principal -- remains officially taboo, it has seeped into the public discourse.
European finance officials “discuss all kinds of topics, including restructuring, but in public we are very reluctant about discussing restructuring and debating restructuring,” Dutch Finance Minister Jan Kees de Jager said.
Central bankers are putting up the most vocal opposition. Bending its mandate to focus on fighting inflation, the Frankfurt-based ECB has bought 76 billion euros of bonds of fiscally struggling countries in the past year and would suffer along with private investors in a restructuring.
Default is “just a nightmare,” ECB council member Christian Noyer said. “It’s the absolutely wrong solution. It would be a catastrophe.”