Portugal’s financial sector can expect some relief after the caretaker government decided to seek financial aid after months of what many economists said was a refusal to acknowledge economic reality.
However, Lisbon will have to agree to tough austerity targets to obtain a bailout, and how quickly a deal can be negotiated at the start of an election campaign is unclear.
Caretaker Portuguese Prime Minister Jose Socrates announced he was asking for financing from the EU on Wednesday, saying the risks to the economy had now become too great to go it alone as borrowing rates soared in recent weeks.
Following in the footsteps of Greece and Ireland, his request comes against a backdrop of political uncertainty after the government resigned on March 23 following parliament’s rejection of an austerity plan.
“I tried everything, but in conscience we have reached a moment when not taking this decision would imply risks that the country should not take,” Socrates said in a televised statement.
The decision removes a cloud of uncertainty over the eurozone and has a good chance of ending the spread of debt market crises to other countries in the region.
WARNING
Portuguese banks will be relieved after taking the unprecedented step on Tuesday of warning that they may no longer be able to buy government debt — a move which likely helped force the government into seeking help.
Negotiations for financial assistance will take place as a campaign kicks off for a June 5 snap general election that will be dominated by the country’s critical economic situation as it enters its second recession in three years.
Socrates cited no figure, but a eurozone official estimated Lisbon is likely to need between 60 billion euros (US$85.7 billion) and 80 billion euros in European and IMF loans over three years.
BIG STEP
Fernando Ulrich, the head of the country’s third-biggest private bank — Banco BPI — said the decision to recognize help was needed was a “big step,” news agency Lusa reported.
However, Portugal’s negotiations for a loan from the EU and IMF could be more difficult than those of Greece and Ireland.
The Socialist caretaker government has said it has limited powers and parliament, which EU officials say would normally have to ratify any agreement before disbursal, is dissolved until the election.
The head of the Social Democrats, the main opposition party, said he supported the request for aid, but the party, in rejecting an austerity plan by the government last month, helped spark the crisis that led to it.
Tullia Bucco, an economist at Unicredit, said EU finance ministers would consider Portugal’s request “in the difficult political environment” at a meeting today and tomorrow in Budapest.
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