Portugal seeks E.U. bailout

April 6, 2011

Portugal asked for a bailout from Europe’s trillion-dollar rescue fund Wednesday, becoming the third European nation in a year to need outside financial help to overcome a crisis driven by high public debt, weak banks and slow growth.

The request to the European Commission came as Portuguese officials acknowledged that escalating borrowing costs and a political deadlock in the country had put it at risk of being unable to raise the funds it needs to keep its government operating.

No amount was specified in the notice sent by outgoing Prime Minister Jose Socrates that the country intends to tap an emergency fund established by the European Union last year to help Greece. The fund has also been used by Ireland.

European officials and outside analysts have estimated the figure to be as much as $100 billion.

Socrates, who resigned recently after a budget-cutting plan was rejected by the parliament, triggering new elections, said the request comes as a “last resort.”

“I tried everything, but we came to a moment that not taking this decision would bring risks we can’t afford,” Socrates said in a statement from Lisbon on Wednesday. “The government decided to make the European Commission a request for financial aid.”

A wide array of analysts expected that Portugal would need help, so the request may have little immediate impact on
markets. International Monetary Fund Managing Director Dominique Strauss-Kahn in recent public statements has been critical of the slow pace of European reaction to its economic problems, and said states that need help are better off asking for it sooner rather than later. In Portugal’s case, a looming April 15 bond issue was expected to be a potential breaking point for the country’s ability to finance its operations, with its long-term borrowing costs rising to about 10 percent — an unsustainable level.

The larger significance will be what happens next, whether world investors start wondering about the fiscal health of larger, heavily indebted European countries such as Spain, or whether Portugal acts as a “firewall” whose rescue marks the end of Europe’s debt crisis and speculation that the 17-nation euro zone may break apart.

In recent comments, Strauss-Kahn and outside analysts have said they think that Spain’s comparatively aggressive action over the past year to cut its budget deficit and restructure its banks has distinguished it from the others.

Still, the next few weeks will form another closely watched chapter in the evolution of Europe’s economic troubles.

The request for help will be followed by extensive talks with European officials and the IMF over what conditions the country will have to meet in return for the lower-interest loans that will keep the government operating while the country tries to revive its economy. The IMF will likely contribute to the Portuguese rescue, though the agency said in a statement Wednesday that it had not yet been asked for assistance. Spanish banks also have major investments in Portugal, raising the risk that the economic problems could spill across the border.

In Portugal’s case, efforts to rekindle growth will be critical. Greece and Ireland succumbed to different sorts of problems — Greece to a massive overload of public debt that it could not afford, and Ireland to commitments made by the government to back up the country’s banks even as a collapsing real estate market led to escalating bank losses.

Portugal, however, has been hobbled largely by an economy that never kept pace with the other nations in the euro zone monetary union. It wed itself, for example, to an economic strategy that focused on lower-wage manufacturing even as those types of jobs were disappearing rapidly to Asian nations such as Vietnam and China.

Portuguese officials had hoped to manage their problems on their own, but as the interest rate demanded by investors escalated in recent days, so did pressure on the government to act.

The European Central Bank has spent tens of billions of dollars over the past year buying the bonds of troubled European countries and lending money to keep its weaker banks afloat, programs that ECB officials are eager to phase out. At the same time, the bank, designed to keep a singular focus on inflation, is expected to begin raising interest rates this week to combat rising prices — a particular concern in Germany, the bank’s most influential member.

That will work against recovery in weaker nations such as Greece, Ireland and Portugal, which was another reason for the country to seek outside help.

Finance Minister Teixeira Dos Santos, in a written response to local newspaper Jornal de Negocios, said that the country was “irresponsibly pushed” by bond investors to seek outside help, but that the country’s political parties would now have to agree on budget, tax and economic changes to satisfy European and IMF demands.

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