Portugal's caretaker government said on Wednesday it had decided to seek financing from the European Union in an abrupt turnaround, having resisted a bailout for months. The European Central Bank (ECB) encouraged Portugal to seek aid in view of the country's rapidly deteriorating financial situation.
"We have encouraged the Portuguese authority to ask for support and that was commanded by the situation after what has happened previously," ECB President Jean-Claude Trichet referring to the downgrading of Portuguese debt to barely above the junk bond level. (The ECB earlier raised interest rates as expected by 25 basis points to 1.25 percent).
The central bank had been privately pushing Lisbon to accept assistance, saying that it was necessary in order to protect the euro zone members from further damage stemming from the ongoing sovereign debt crisis.
Portugal is at too much risk
Portugal’s Prime Minister, Jose Socrates, who will be leaving office in June, said that “We have reached the moment where the country is at too much risk," according to the BBC.
Mr. Socrates said the country was "at too much risk that it shouldn't be exposed to." The government had stubbornly resisted asking for aid but last week admitted that it had missed its 2010 budget deficit target.
"I always said asking for foreign aid would be the final way to go but we have reached the moment," Mr. Socrates said. "Above all, it's in the national interest."
The BBC also reported that European Commission President Jose Manuel Barroso, who ironically is Portuguese, said in a statement that Portugal's request would be processed "in the swiftest possible manner, according to the rules applicable". He also reaffirmed his "confidence in Portugal's capacity to overcome the present difficulties, with the solidarity of its partners."
Bailout May Reach $129 Billion
Meanwhile, The Wall Street Journal reported that the country will need up to $129 billion in a package that will be co-funded by the European Union and the International Monetary Fund.
Further, the bailout will be considered at a EU finance ministers’ meeting in Hungary this week. In this regard, German Finance Minister Wolfgang Schaeuble said that the Portugal must also adhere to an austerity program. That austerity program had previously been rejected by the Portuguese government which triggered a political crisis that culminated in the resignation of the minority government led by Mr. Socrates – and austerity measures will ultimately weigh heavily on Portuguese society.
In the meantime, among the matters that need to be resolved, the bailout will finance Portugal’s short-term debt obligations, cash shortfalls at public-service companies and repay loans made to the nationalized bank, Banco Portugues de Negocios, according to the Journal.
Mr. Socrates requested the bailout because of the “unsustainable financing conditions.” Portugal is the third country in the 17-member euro zone to request help from other countries along with Greece in the fall of 2010, and Ireland earlier this year.
The European Commission and the ECB are both expected to be involved in the bail-out funding as well as the IMF. While the defunct government was able to raise about 1 billion euros after tapping the financial markets at rates exceeding 9%, several rating agencies subsequently downgraded the country's debt which effectively cut Portugal off from the capital markets for future borrowing and forced the government to seek a bailout.
The meeting of European finance ministers had already been scheduled for Thursday in Budapest and the United Kingdom’s Treasury Minister Mark Hoban will attend. However, a source at the Treasury said that the bilateral loan offered to the Irish Republic was "very much a special case" and a similar offer is "not on the table" for Portugal, according to the BBC report.
Jan Randolph, head of sovereign risk at IHS Global Insight, told the BBC that Portugal might organize "some sort of bridging loan" in the short term. But he added: "The real big loan over several years will require a medium-term plan and I don't think that can be agreed until the new government comes into place."
Elections are due to take place in June.
Sources
Matthew Price, "Portugal Seeks Bailout", BBC, Apr 6, 2011
Patricia Kowsmann, Costas Paris, Portugal Bailout May Reach $129 billion, The Wall Street Journal, Apr 7, 2011
Kyle Colona - Kyle Colona is a freelance writer from the New York area with an extensive background in legal and regulatory affairs.
