Euro zone to back Portugal aid, with new caveats

By Jan Strupczewski

BRUSSELS (Reuters) - Euro zone finance ministers are likely to back a bailout package for Portugal on Monday, with new conditions set by Finland, in talks overshadowed by charges against IMF chief Dominique Strauss-Kahn for attempted rape.

Strauss-Kahn's place in the Brusssels talks will be taken by International Monetary Fund Deputy Managing Director Nemat Shafik, the organization said.

The meeting was also expected to pressure Greece to announce more austerity steps to secure further emergency funding. A senior Greek official said on Sunday the arrest of Strauss-Kahn may cause some delays to its EU/IMF bailout plan.

Strauss-Kahn had been due to meet German Chancellor Angela Merkel as well as attend the meeting of euro zone finance ministers.

"This might definitely cause some delays in the short term," the official told Reuters on condition of anonymity, referring to meetings planned for Sunday and Monday.

"Strauss-Kahn had a very good knowledge of Greece's situation."

But the official added: "This will not change the IMF's policy on Greece. Greece will continue to implement its programne."

Portugal agreed this month on a 78 billion-euro loan programme over three years with the European Commission and the International Monetary Fund (IMF).

The plan needs to be approved unanimously by euro zone finance ministers, but Finland's parliament set conditions for its support on Friday, saying Lisbon had to ask private bondholders to maintain their exposure to Portuguese debt.

The second condition set by Finland is for Portugal to embark on a privatisation programme to raise funds.

If euro zone finance ministers agree to the Finnish demands, it will mark a change from the bailout programmes of Ireland and Greece, which did not mention any need for private investors to maintain their exposure to the countries' debt.

"I am confident that the Portuguese package will be approved on Monday," Economic and Monetary Affairs Commissioner Olli Rehn, a Finn, told reporters on Friday.

Rehn said the interest rate on loans to Portugal, to be decided by the ministers, would be between 5.5 and 6.0 percent.

This is in line with the borrowing cost set by the initial euro zone agreement on emergency funding through the European Financial Stability Facility (EFSF), rather than a more favourable EFSF lending rate EU leaders suggested in March.

Greek borrowing costs, originally at around 5.2 percent, were lowered by euro zone loaders to 4.2 percent in March. But the interest rate for Ireland of around 5.8 percent was not cut because of a dispute over Irish corporate tax levels, which France and Germany see as too low.

Finland also decided that to take part in any further bailouts after Portugal, it would require a borrowing country to provide collateral for emergency loans from the euro zone, to limit taxpayers' exposure.


This is important for Greece, which already has a 110 billion-euro EU/IMF bailout until mid-2013, but which is likely to need more funds next year because initial forecasts that it could return to markets in 2012 appear to be unrealistic.

A euro zone source involved in the preparation of the ministers' meeting told Reuters additional Greek financing needs in 2012 and 2013 would be discussed at the ministers' meeting.

Yet the position of the Finnish parliament is likely to mean that to get additional funds to cover its financing gap, estimated at 65 billion euros over the next two years, Greece will have to provide collateral for the new euro zone loans.

The source said that countries in the single currency area could come up with additional funding for Greece only if Athens met the fiscal consolidation and reform targets it has already committed itself to, which would require new steps.

Rehn was clear on Friday that Greece had to do more, because it was missing its deficit reduction targets.

"Because of weaker than expected growth last year, plus some fiscal slippages, there is need to take additional measures in fiscal consolidation still this year," Rehn said.

"How much, will depend...on our mission currently in Athens. Yes, definitely there is a need to take further consolidation measures," he said.

In return for the emergency loans from the 110 billion package, Greece has committed itself to bring its budget deficit down to 7.6 percent of gross domestic product this year, 6.5 percent in 2012, 4.9 percent in 2013 and 2.6 percent in 2014.

The European Commission forecast on Friday that unless policies changed, Greece would have a budget deficit of 9.5 percent of GDP this year and 9.3 percent in 2012 -- well above the targets agreed in the EU/IMF programme.

Greek debt would rise to 157.7 percent of gross domestic product this year and to 166.1 percent in 2012, rather than be 145.2 and 148.8 percent as under the EU/IMF plan targets, the Commission forecast.

The Monday meeting, however, will not make any decisions on Greece. The ministers want to wait for the results of the joint EU and IMF mission in Athens which is likely to finish its assessment of Greek reforms and the country's debt sustainability only later in the week.

The euro zone ministers and their counterparts from EU countries still outside the euro zone will also discuss on Monday the setting up of the European Stability Mechanism -- the permanent euro zone bailout fund that is to replace the EFSF from mid-2013 onwards.