Portugal must agree "harder" reforms to get aid

By Jan Strupczewski

BUDAPEST (Reuters) - Euro zone finance ministers told Portugal on Friday that it would have to implement new economic reforms that went beyond those proposed by its outgoing government if it hoped to secure aid from the EU and IMF.

Portugal bowed to intense pressure from financial markets and its European partners this week and became the third euro zone country after Greece and Ireland to request financial help from the European Union and the International Monetary Fund.

Finance ministers from the 17-nation single currency area met in Budapest on Friday to discuss the sovereign debt crisis that has haunted the bloc for over a year, with Portugal the main focus of their talks.

"The package must be harder and more comprehensive than the one which parliament voted against."

French Economy Minister Christine Lagarde said she expected Portugal to propose specific steps that would restore confidence in an economy that is among the least competitive in the currency zone.

Portuguese Prime Minister Jose Socrates resigned late last month after parliament rejected a new round of budget austerity meant to help the country meet its deficit reduction targets for 2011.

He is continuing to serve in a caretaker capacity until new elections are held on June 5. The main opposition party has backed the request for aid, but negotiations on an economic adjustment program -- a precondition for assistance -- are likely to be tough as cross-party consensus will be needed.

"We need a commitment of the country not only a commitment of the government," Portuguese Finance Minister Fernando Teixeira dos Santos said.

"I think we have to be committed to reaching an agreement as soon as possible," he added.

Lisbon is expected to require 80-85 billion euros in aid, roughly the same amount as Ireland but less than the 110 billion euro package offered to Greece nearly one year ago.

NOT SPAIN

Ministers tried to drive home the message in Budapest that the contagion that has spread like a virus across the bloc's southern periphery would not hit Portugal's larger neighbor Spain, which has scrambled to reform its labor market, pension system and savings banks this year to avoid a similar fate.

Spanish Economy Minister Elena Salgado said a bailout for her country was "completely out of the question" and European Economic and Monetary Affairs Commissioner Olli Rehn told reporters he was sure Spain would not require assistance.

For now at least, markets seem to agree. The euro rose to a 15-month high against the dollar on Friday, following a rise in official euro zone interest rates a day earlier.

The spreads between Spanish bond yields and those of German benchmarks -- a key measure of investor confidence in Spain's finances -- have changed little since Portugal announced on Wednesday it would seek aid.

The spreads on 10-year bonds hovered at around 1.8 percentage points on Friday morning.

But the rise in the euro undermines the competitiveness of the euro zone's weaker economies and investors continue to look closely at Spain's weaknesses -- a banking sector weakened by the property crash and its struggle to generate growth.

"Fortunately, despite the Portuguese woes, Spain is perceived to be more solid by the markets," analysts from Dutch bank ING said in a research report.

BAILOUT COSTS

Rehn said he expected ministers to mandate the European Commission, European Central Bank and the IMF to negotiate a package with Portugal.

Under EU rules, this "troika" must send a mission to a country requesting financial aid to establish the parameters of the support program. That would then be put into a memorandum of understanding.

The ministers may also discuss the interest rate that the European Financial Stability Facility (EFSF), the bloc's temporary rescue fund, will charge for its loans.

Interest on EFSF loans is likely to fall by 100 basis points in June, once euro zone leaders give their final approval to a new package of anti-crisis measures.

Ministers will also examine the economic situation in Ireland after the latest round of stress tests of the country's stricken financial sector.

Greece will also be a focus amid reports that the country will report a bigger-than-expected budget deficit for 2010.

Speculation has grown in recent weeks that Athens may have to restructure a debt load that is expected to peak at over 150 percent of gross domestic product (GDP), with senior government officials in the euro zone conceding in private such a step may be inevitable.

But the Greek government and leaders of other euro members have rejected that talk.

(Additional reporting by Thomas Leigh, John O'Donnell and Francesca Landini in Budapest)

(Writing by Noah Barkin; editing by Patrick Graham)