April 6, 2011 11:40 pm

Doubts remain over needed austerity measures

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The Portuguese government appealed on Wednesday for European Union help to meet its debt-financing needs, but the question remains as to whether it can implement the austerity measures required for a bail-out.

José Sócrates, prime minister, made the request after his government was forced to pay yields above 5 per cent to raise €1bn ($1.4bn) in short-term debt.

Analysts say Portugal would have to pay similarly “prohibitive” interest rates in five other debt auctions scheduled for the next two months from which it hopes to raise up to €6bn.

Mr Sócrates had until Wednesday looked determined to scrape by until elections on June 5, thus avoiding the ignominy of appealing for aid from the EU and International Monetary Fund.

He had insisted his outgoing minority government lacked the authority to negotiate a bail-out from the €440bn European financial stability facility that would require tough austerity measures of the sort the opposition voted down last month, triggering elections.

Now Mr Sócrates will have to assemble cross-party support for a financial lifeline in the midst of an increasingly bitter election campaign.

He was hardly conciliatory on Wednesday night, blaming the opposition Social Democrats (PSD) for precipitating a political crisis and making the request necessary.

Pedro Passos Coelho, the PSD leader and favourite to become Portugal’s next prime minister, said the request had come too late, but he would nevertheless support it.

While analysts and officials in Brussels had been confident that Lisbon would be able to meet €5bn in bond redemptions and interest payments that fall due on April 15, there was growing concern about the €7bn in bond and interest payments due in mid-June.

Analysts said there was a danger that Lisbon would not be able to meet those debt repayments while still lacking an effective administration to deal with the emergency, creating the risk of a disorderly default and financial contagion across the eurozone.

Portugal’s request for aid thereforemet with relief in Brussels. “It is a responsible move by the Portuguese government,” Olli Rehn, the EU’s top economic official, told the Financial Times.

Portuguese officials had already begun talks with the European Commission on short-term financing to meet funding needs until a new government could be set up.

Officials were exploring the possibility of short-term bilateral loans from other eurozone countries, as provided to Greece last year, or whether a separate EU-wide rescue fund, the European financial stability mechanism, could be used.

However, political sentiment has moved against loans in richer eurozone countries and people involved in the discussion said no such loan would be granted without commitment from all Portuguese political parties to support new austerity measures.

Given these difficulties, Lisbon seems to have concluded it had no option but to appeal for a full-blown EU/IMF rescue, although Mr Sócrates did not specify what aid he was seeking.

The biggest political hurdle remains Lisbon’s inability to pass EU-backed austerity measures that eurozone member states insist are required for a bail-out.

A senior EU official said the inability of Portugal to get a consensus on austerity measures has been the main point of contention in closed-door talks.

The Portuguese opposition has said it is committed to the same deficit reduction targets as Mr Sócrates, but it differs on the details, and it remains unclear whether the gap can be breached in order to gain an EU sign-off to the bail-out loans.

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