Portugal third eurozone economy on lifeline

illustration photo

"The government has reached a good agreement that defends Portugal," outgoing Prime Minister Jose Socrates announced on television late on Tuesday, but the country got a rough ride on Wednesday when it had to pay sharply increased rates to borrow money.

A deadline looms on June 15, six weeks away, when Portugal must redeem old loans of nearly 5.0 billion euros ($7.3 billion) and avert default. The country now joins Greece and Ireland as eurozone members on financial life support from the EU, ECB and IMF.

Socrates signalled that in one sense the conditions of the deal give Portugal some extra breathing space.

He said that the deal worth $116 billion "is a three-year programme which sets more gradual deficit reduction targets: 5.9 per cent this year, 4.5 per cent in 2012 and three per cent in 2013."

Portugal had previous targets of 4.6 per cent this year, 3.0 per cent in 2012 and 2.0 per cent in 2013. The EU ceiling is 3.0 per cent.

Experts from the International Monetary Fund, the European Union and the European Central Bank met conservative opposition parties on Wednesday to obtain their support for the bailout conditions if they win an early election on June 5.

The opposition precipitated the election in March by rejecting additional cutbacks to fight Portugal's 160.4-billion-euro debt mountain -- worth nearly a year of the nation's output -- although that was primarily because the government sprang the austerity measures on lawmakers without consultation.

The main opposition centre-right Social Democratic Party leader Pedro Passos Coelho signalled it favoured the bailout.

"The PSD has said since the start it would not let the country go bankrupt and I hope that this aid will arrive soon," Coelho told journalists.

However, he said the party would announce a definitive position later after studying the details of the pact negotiated by the outgoing government.

The international negotiators were expected to speak to the media on Thursday morning.

According to the text of the deal published in Portuguese media, additional budget savings of 8.8 billion euros are to be made in 2012 and 2013.

Income tax would rise, sales tax would increase on certain products, the highest pensions would be cut, and the length and amount of unemployment benefit would be trimmed.

The next government would also have to reform the labour and energy markets, and raise 5.5 billion euros from privatisation of state assets.

Portugal would have to pay interest on the rescue money at two per centage points above the rate paid by the European Financial Stability Facility, which would mean 4.68 per cent, and 12.0 billion euros of the borrowed money would be used to strengthen the banks.

In this fevered climate, Portugal went ahead with an operation to raise funds for three months, borrowing 1.117 billion euros, but had to pay interest of 4.652 per cent, sharply up from 4.046 per cent when the last such issue was made on April 20.

On the market for existing debt, the yield or rate on 10-year bonds eased to 9.333 per cent from 9.411 per cent at the close on Tuesday.

In London, Capital Economics analyst Jonathan Loynes, noting the fall, said that markets had given a "positive" response to the deal but that the bailout was "very unlikely to mark an end to the country's problems."

At Barclays Capital, Chief European Economist Julian Callow agreed the initial market response had been positive.

"The concerns that are out there ... about Europe's ability to deal with the issues that exist in particular parts of Europe are taken care of by programmes such as this one that's just been agreed...," he told AFP.

"It removes some negative risks from people's risk assessment."