Deal Struck Portugal to Receive 78 Billion Euro Bailout

Lisbon has reached an agreement with the EU and the IMF to receive 78 billion euros in aid over the next three years to assist it with a crippling debt load. But with Portugal's government in flux and euro-zone approval dependent on suddenly euroskeptic Finland, final approval is far from a sure thing.
Portugal is to receive €78 billion in emergency assistance.

Portugal is to receive €78 billion in emergency assistance.

Foto: Jens Büttner/ dpa

The agreement may have been the easy part. Portugal's caretaker Prime Minister Jose Socrates said on Tuesday evening that his country had reached a deal with the European Union and the International Monetary Fund on the outlines of a bailout worth €78 billion ($115 billion) over three years. Now, though, euro-zone states must unanimously approve the aid package and the Portuguese parliament must likewise give its endorsement.

Details of the bailout remain scant, but it is thought to include €12 billion for the recapitalization of Portuguese banks. Reuters is reporting on Wednesday that the package will also require Lisbon to raise €5.3 billion in the next two years through the privatization of state assets. The interest rate Portugal will owe on the massive loan is to be hammered out at a meeting of euro-zone finance ministers in mid-May.

"The government got a good deal," Socrates said in a televised address on Tuesday evening. "This is a deal that defends Portugal."

Socrates said that the deal will require Portugal to lower its budget deficit to 5.9 percent of gross domestic product this year -- up from the original target of 4.6 percent. In 2012, the deficit is set to drop to 4.5 percent before finally meeting the mandated European Union maximum of 3 percent in 2013. He also added that there would be no additional civil servant layoffs, and job and welfare entitlements would remain unchanged.

Avoiding Greek Pitfalls

Portugal is the third debt-ridden member of the European common currency zone to seek assistance. Greece received a €110 billion loan last spring and Ireland followed suit in the autumn, taking out an €85 billion loan from the European Financial Stability Facility (EFSF) and the European Union, among other places.

Portugal, though, is hoping to avoid the pitfalls which have befallen Greece, where concerns about the country's ability to handle its debt burden have not dissipated, despite the EU/IMF aid package. Furthermore, the country's economy has struggled mightily in the face of deep austerity measures and remains in recession. Athens this week once again asked for a repayment extension and a cut in the interest rate due -- just months after similar improvements were already granted the Greeks.

Reuters on Wednesday is reporting that the bailout package for Portugal could result in a 2 percent contraction of the country's gross domestic product in 2011 and 2012.

Before revealing details of the aid package, European Union officials want to ensure that it will be fully implemented. Socrates stepped down as the country's prime minister in March after the failure of an austerity package in parliament and snap elections are currently scheduled for early June. The EU is negotiating with Portuguese opposition parties to line up support for the package of reforms Brussels will demand in exchange for the loan.

The 17-member euro zone, though, must also grant its unanimous approval of the bailout package -- approval that recent elections in Finland may endanger. The vote saw the radically anti-EU party True Finns receive 19 percent of the vote and the party's leader, Timo Soini, has made it clear that he is opposed to euro zone bailouts. The country's Social Democrats, who received 19.1 percent of the vote, are likewise extremely skeptical of aid packages. Finland is the only country in the euro zone which requires parliamentary approval before its government can vote in favor of bailout packages. Negotiations over the final makeup of the new coalition government are still continuing.

The euro zone is hoping to gain approval from both sides quickly. Portugal faces debt repayment obligations of up to €7 billion in June.

cgh -- with wire reports
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