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Portugal Becomes Third of PIGS To Seek EU Bailout
Portugal has become the third European nation to accept a financial bailout to the tune of € 78 billion, with € 12 billion going directly to the Iberian nation’s banks. It is the third of four PIGS nations (Portugal, Ireland, Greece, Spain) to require a bailout. Caretaker Prime Minister Jose Socrates announced that he had reached preliminary agreement with the European Union (EU), International Monetary Fund (IMF) and the European Central Bank (ECB) for a three-year package of support, including help for Lisbon’s banks. Portugal’s bailout means three of the eurozone’s 17 countries can be described as being in financial intensive care. Greece accepted €110 billion of bilateral loans last year; Ireland signed an € 85 billion bailout last November — with the long-term fiscal and economic prognosis for all three nations still uncertain. Socrates believes that he has secured a good deal, saying, “There are no financial assistance programs that are not demanding.”
The eurozone’s three patients are on three different medicine regimes: Greece’s loans must be repaid over seven years at an average 4.2 percent interest rate; Ireland’s over seven years at an average 5.8 percent rate (although it is trying to change the rate); and Portugal’s is still under discussion. “I think the terms inevitably are going to be different in each country because the circumstances are…different,” said Eamon Gilmore, Ireland’s minister for foreign affairs. “The government would be very fed up too if another country was getting a bailout deal better than the terms that we are getting,” he said.
“The capital of these banks isn’t really the main problem at the moment. The focus is their dependency on the ECB for liquidity and how they can get out of that and somehow fund themselves in the wholesale market again,” said Carlo Mareels, banks analyst for RBC Capital Markets. Portugal’s banks have been unable to raise funds in wholesale markets for the last year, demonstrating exactly how intertwined the fortunes of the state and lenders has become in eurozone countries. Margins have been squeezed as banks compete for retail deposits, which strains their capital positions. The declining value of their government bonds makes a bad situation even worse.
Simonetta Nardin, a spokeswoman for the IMF, l confirmed that officials had reached an agreement with the Portuguese government ”on a comprehensive economic program. We have said from the beginning that it is important that any program should have broad cross-party support and we will continue our engagement with the opposition parties to establish that this is the case.” The bailout requires EU approval. Portugal’s prime minister said that he would present the deal to opposition parties and called on them to show ”a sense of responsibility and a superior sense of national interest” to ensure Portugal receives emergency financing quickly. Under the plan, the deficit would need to be reduced to 5.9 percent of GDP this year; 4.5 percent in 2012; and three percent in 2013.
Jonathan Loynes, chief European economist at Capital Economics, predicted that Portugal’s GDP will decline by two percent in 2011. “Against this background, while the confirmation of the bailout should provide some reassurance that Portugal will be able meet its upcoming bond redemptions, it won’t put an end to speculation that – along with Greece and perhaps others – it will sooner or later need to undertake some form of debt restructuring,” he said.
The bailout needs wide-ranging cross-party support because Socrates’ government collapsed last month, which set off a round of increased borrowing rates. Additionally, it forced Lisbon to seek financial assistance from the EU. The winner of the June 5 general election will implement it. Agreement on the loan terms is required by June 15, when Lisbon needs to redeem € 4.9 billion worth of bonds.