Portugal bailout could top $100 billion in new problem for European Union

Portugal may need in excess of $100 billion to keep functioning while it restructures its economy in coming years, a top European official said Thursday, as European leaders began to come to grips with the latest crisis in their region.

European Union heads of state gathered in Brussels for a two-day summit intended to focus on new efforts at bolstering the European economy, but it will likely be dominated by Portugal’s possible need of an emergency bailout.

Though the country has not asked for help, it faces pressing financial needs beginning next month at a time when investors are demanding record interest rates to buy the country’s bonds. The collapse of Portugal’s minority government on Wednesday led to a seeming consensus among analysts that a request for help was soon to come, and on Thursday, European officials appeared to be tallying the cost.

Jean-Claude Juncker, the prime minister of Luxembourg and head of a committee of the 17 nations that share the euro as a currency, told France 24 television ahead of the Brussels meeting that $105 billion would be an “appropriate” amount to give Portugal the time it needs to rejuvenate an economy that has lagged the rest of the eurozone, Reuters and other wire services reported.

The figure would be less than the amounts extended to Ireland and Greece in the two other eurozone bailouts over the past year, but that would leave an existing emergency fund close to the limits of what it can currently lend.

Portuguese Prime Minister Jose Socrates is attending the meeting but in a caretaker capacity as his country looks ahead to new elections and potentially difficult negotiations with the International Monetary Fund and other European nations over an emergency package.

The Portuguese crisis is clouding what was to have been an otherwise celebratory summit where leaders are expected to approve a new economic program for the eurozone nations that will set up a permanent crisis fund to help troubled countries, while also establishing stronger common rules for government spending and economic cooperation.

But the Portuguese crisis is only one of a number of dark clouds hanging over the process. Most notably, an ongoing banking crisis has kept investors wary about the health of European banks, the amounts that already indebted governments may spend to keep local financial institutions afloat and whether existing bank and government bondholders may see the value of their investments trimmed.

In a pointed reminder, Moody’s investor service on Thursday downgraded the credit ratings of 30 smaller Spanish banks, a move that may make it more expensive for those banks to raise the capital they will need to stay in business and hasten a consolidation underway in Spain’s banking sector.

The deep exposure of Spanish banks to Portugal’s economy is also a concern being weighed by analysts and investors studying whether Europe can finally put a year of crisis behind it and concentrate on boosting its tepid economic growth.

The package under debate in Brussels is a milestone in some respects, committing the eurozone countries to a set of shared economic policies, while providing a common fund any of them can tap in a crisis.

But the money available in the short run may be inadequate if a new debt crisis breaks out in Spain or one of the other large economies before the permanent fund takes effect in two years; other provisions of the pact have made bondholders wary about the safety of their investments.

The pact “falls short of being fully comprehensive to the point where it will put this (issue) to bed,” said James Mason, a research analyst for western Europe at the Roubini Global Economics consulting firm.

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