Published April 07, 2011
LISBON/BRUSSELS – The European Commission expects a formal request from Portugal for aid "soon" and a deal will probably be agreed to ease its debt crisis before a new government is elected on June 5, officials said on Thursday.
An EU source said Prime Minister Jose Socrates' caretaker cabinet still had to clear up that it had the political authority to sign up to a deal that is likely to include painful budget cutbacks.
But bank stocks rallied in response to the U-turn by Socrates, who has resisted a bailout for months, and analysts said they believed a deal could be negotiated quickly despite the political vacuum during the election campaign.
"The Portuguese programme will be agreed before the elections on June 5," a senior European Union source said, adding that the first loans were very likely to be made to Portugal by then. A formal request would be made "in the next day or two," the source said.
Lisbon will have to agree to tough austerity targets if it is to follow Greece and Ireland in signing up for an estimated 60-80 billion in support from other members of the bloc.
Portuguese banks won an instant boost after taking the unprecedented step of warning the government on Monday that they might no longer be able to buy government debt -- a move which probably tipped Socrates into seeking help.
Publico daily said "pressure from banks was decisive for the government's request for aid."
The European Commission spokesman Amadeu Altafaj said on Thursday it had not yet received a formal request from Portugal for financial assistance, but expected such a request soon.
"I'm sure they won't take long," he said.
German Finance Minister Wolfgang Schaeuble said the aid could only be granted in the framework of a reform programme, which would take two to three weeks to put together, adding that the issue would be discussed at a Euro Group meeting in Hungary on Friday.
The campaign for a June 5 snap general election will be dominated by the country's critical economic situation as it enters its second recession in three years but the main centre-right opposition endorsed Socrates' decision.
President Anibal Cavaco Silva urged cooperation between all political parties.
"I appeal for an attitude of responsible cooperation by all opposition parties," he said in a message on his Facebook page.
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.
Constitutional experts and political analysts said that with parliament dissolved and Portugal needing to repay bonds within days of the June vote, the two main political parties and the president could negotiate a deal with the European Union and the International Monetary Fund.
The centre-right opposition Social Democrats helped precipitate the crisis by rejecting an austerity plan by the government last month.
"The parties are doomed to come to an agreement now on the terms of the aid, and I am certain negotiations are already underway," said Boaventura Sousa Santos, a legal and political expert at the Coimbra University.
"I don't see parliament being called back," he added.
Citigroup warned in a note that "without a clear political agreement on the set of policy measures to implement, the other European countries may be unwilling to sign off the deal."
But the market reaction was broadly placid. Shares in Banco Espirito Santo soared 7 percent in early trade, and Millennium bcp rose more than 5 percent. The banking rally helped lift Lisbon's index 1.4 percent.
The yield on Portugal's benchmark 10-year bond edged up to 8.83 percent from Wednesday's close of 8.79 percent having fallen sharply on Wednesday afternoon before the announcement.
RISKS TOO GREAT
Socrates announced he was asking for financing from the European Union on Wednesday, saying the risks to the economy had now become too great to go it alone as borrowing rates soared in recent weeks.
"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," he said in a televised statement.
Socrates cited no figure but a euro zone official estimated Lisbon is likely to need between 60 and 80 billion euros in European and International Monetary Fund loans over three years. Diario Economico newspaper said a bailout of up to 90 billion euros could be expected, but did not cite any source.
Analysts said the decision removed a cloud of uncertainty over the euro zone and has a good chance of ending the spread of debt market crises to other countries in the region.