Portugal aid talks enter key phase

By Noah Barkin

LISBON (Reuters) - A crucial new phase of Portugal's bailout negotiations will begin under a cloud on Monday after an anti-euro party in Finland that has vowed to veto the pending rescue scored strong gains in an election.

Representatives of the European Commission, the European Central Bank and the International Monetary Fund are in Lisbon to set the terms for what would be the euro zone's third bailout in a year after multi-billion euro deals for Greece and Ireland.

The officials examined Portugal's public accounts last week and are due to begin nitty-gritty policy discussions with the government on Monday. The bailout is expected to total 80 billion euros.

The aim is to come up with a radical economic reform plan -- including privatizations, labor market reforms and steps to shore up fragile banks -- by mid-May, just weeks before the government faces an acute funding crunch and Portugal is due to hold a snap election.

But regardless of how those talks go, the country now faces a new threat from a fellow euro zone member that lies some 3,000 km (1,900 miles) to the north.

In an election in Finland on Sunday, the eurosceptic True Finns party made huge gains and may now be in a position to block Portugal's bailout if it ends up joining the next government in Helsinki.

A little more than an hour after the first results were broadcast showing his party in a neck-and-neck race to win the most votes, True Finns leader Timo Soini was already vowing to torpedo the Portuguese deal.

"The package that is there -- I do not believe it will remain," he said.


It may take weeks to know whether the party can back up that threat, but its success in the election potentially poses a huge risk to Lisbon, which has said it will run out of funds to keep the country running in June.

Any delay in approving the bailout deal beyond the mid-May target could leave European leaders scrambling to find other means of funding for Portugal, a country of 10.5 million that has been targeted by investors during the euro zone crisis because of its high debt levels and uncompetitive economy.

Unemployment in Portugal has been increasing steadily for almost a decade, education levels are well below the euro zone average and the country depends heavily on industries like textiles, where competition from powers like China is fierce.

Even before the Finnish vote, Portugal faced significant political obstacles to sealing a deal with the EU and IMF.

Prime Minister Jose Socrates is serving in a caretaker capacity since resigning last month following the rejection of his latest austerity plans by opposition parties in parliament.

With an election due on June 5, the rescue deal must be approved not only by his government but by the main opposition party, the Social Democrats (PSD), who are leading in the polls in the run-up to the vote.

Bailout talks could be complicated further by what Portuguese weekly Expresso said were disagreements between European officials and the IMF on loan conditions.

Expresso said the IMF was insisting on a lower average interest rate on the bailout loans for Portugal than Greece and Ireland initially received and wanted the aid to last four rather than three years to give the Portuguese economy additional time to recover. It said richer European nations were resisting the idea, fearing a public opinion backlash at home.

Officials could not be reached for comment on the report.

(Editing by Elizabeth Fullerton)