Portugal seeks EU bailout
Following months of speculation Portugal has been forced to follow Greece and Ireland and ask the European Union for a financial bailout which analysts expect to be between €70bn and €80bn.
José Sócrates, the socialist caretaker Prime Minister who resigned on March 23 when parliament rejected his latest austerity measures, made the announcement last night. He had previously insisted Portugal would not require rescuing - and questions had been raised about whether a caretaker administration had the authority to make such a decision. One possibility is that a bridging loan will be provided until elections will take place on June 5.
In a televised address broadcast yesterday Sócrates said: "I want to inform the Portuguese that the government decided today to ask for financial help, to ensure financing for our country, for our financial system and for our economy. This is an especially grave moment for our country. Things will only get worse if nothing is done." The opposition Social Democrat leader Pedro Passos Coelho backed the decision.
Portugal's credit rating had been downgraded to what Sócrates described as "dangerous levels never seen before". On Wednesday the government had to pay yields over 5 per cent to raise €1bn in short term debt. The interest rate on its 10-year bonds had reached 8.5 per cent. Portugal is due to repay €5bn of debt on April 15 and a further €7bn on June 15 while unemployment stands at 11.1 per cent. The caretaker prime minister had been under pressure from banks to seek international assistance from the EU's €440bn European Financial Stability Facility.
In a statement Sócrates' compatriot the President of the European Commission José Manuel Barroso said he was confident that Portugal would overcome it problems "with the solidarity of its partners". The European Central Bank and the International Monetary Fund are likely to be involved in the bailout.
The leader of the British Conservative Party in the European Parliament, Martin Callanan, said the UK should play no part in the bailout. "The legality of bailouts under article 122 of the EU treaties is still highly dubious. The article was intended to cover natural disasters not bailouts for countries who have sleep-walked into this crisis through their own socialist policies."
He added: "We are rapidly reaching the point where structural reforms are required rather than short-term sticking plasters. Europe is sinking fast under the weight of its own uncompetitiveness and debt."
The Institute of Directors' chief economist Graeme Leach said the eurozone was unsustainable in its present form. "History teaches us that monetary unions either end in political union or failure. Simple debt arithmetic, together with the need for the PIGS economies to make giant competitive gains, suggests that the euro won't survive in its current form."
Leach, who today published a report on the future of the eurozone, added: "The PIGS economies face the challenge of how to escape when there is no escape. Exiting the eurozone may seem attractive because it would lead to a devalued currency, but debt liabilities would still be in euros. There could be a run on the banking system and there would be the chaos of switching back from one currency to another, changing software, prices and cash dispenser machines."
Philip Booth, professor of insurance and risk at Cass Business School in London, said that Portugal should be allowed to default on its debt. "The central institutions of the EU should not interfere in the debt markets of individual member states," he said. "The Portuguese economy needs urgent reform to ensure long term growth economic growth, lower government spending and lower taxation."
The ECB today put up interests rates from 1 per cent to 1.25 per cent as attention turned to Spain - which has been introducing its own austerity measures in an effort to avoid the fate of its neighbour. Spain's borrowing costs fell shortly after Portugal's announcement and its Finance Minister Elena Salgado has said there is no risk of contagion. European finance ministers will discuss the Portuguese bailout when they meet in Budapest today and tomorrow.