Portugal to formalize aid request, help seen by June

By Filipa Lima and Julien Toyer

LISBON/BRUSSELS (Reuters) – Portugal will formalize its request on Thursday for a European Union rescue package that could reach 85 billion euros ($122 billion) and a deal could be reached before a June 5 election, officials said.

After a renewed battering from financial markets sparked by a political crisis, Lisbon’s caretaker government decided on Wednesday to seek foreign aid, becoming the third euro zone country to do so after Greece and Ireland.

“Portugal will today formalize its request with the European Commission,” Cabinet Minister Pedro Silva Pereira told reporters after a cabinet meeting.

The Socialist government resigned on March 23 after parliament rejected its austerity plan, sparking a crisis that pushed Portuguese borrowing rates sharply higher and led to multiple downgrades of the country’s credit rating.

A euro zone source played down concerns that Prime Minister Jose Socrates’ government might not have the necessary powers to negotiate a bailout program, saying it probably would do so in close coordination with the main opposition party.

The source said that the main elements of the program would be in line with those previously announced by the government and that budget targets would likely be little changed.

“The Portuguese program will be agreed before the elections on June 5,” another senior European Union source said, adding that the first loans were very likely to be made to Portugal by then.

Silva Pereira would not comment on the likely size of the aid but Finland’s government said it could amount to 75-85 billion euros ($107-122 billion).

Bank stocks rallied in response to the U-turn by Socrates, who has resisted a bailout for months, and analysts said they believed a deal could be negotiated quickly despite the political vacuum during the election campaign.

Portuguese banks took the unprecedented step on Monday of warning the government that they might stop buying its debt — a move which probably tipped Socrates into seeking help.

The head of Portugal’s banking association, Antonio de Sousa, told Reuters in an interview that the European Central Bank had told the country’s banks to cut exposure to government debt.

German Finance Minister Wolfgang Schaeuble said the aid could only be granted in the framework of a reform program, which would take two to three weeks to put together, adding that the issue would be discussed at a Eurogroup meeting in Hungary on Friday.

POLITICAL CONSENSUS

The campaign for a June 5 snap general election will be dominated by the country’s economic crisis as it enters its second recession in three years.

President Anibal Cavaco Silva urged cooperation between all political parties on seeking aid.

“I appeal for an attitude of responsible cooperation by all opposition parties,” he said in a message on his Facebook page.

Cabinet minister Silva Pereira said the government had asked the president to follow the negotiations on aid and urged him to coordinate with the opposition. The opposition Social Democrats have said they back the request for aid.

The Socialist caretaker government said it has limited powers and parliament, which EU officials say would normally have to ratify any agreement before disbursal, is dissolved until the election.

Fitch rating agency, which downgraded Portugal by three notches last week, said it expects an agreement.

“While negotiating an economic policy program with the EU-IMF during a general election period will be challenging, Fitch does expect agreement to be reached on at least the key short-term fiscal and economic policy measures necessary to unlock financial support in the near-term,” said Douglas Renwick, director at Fitch’s Sovereign Ratings Group.

Constitutional experts and political analysts said that with Portugal needing to repay bonds within days of the June vote, the two main political parties are likely to reach agreement.

“The parties are doomed to come to an agreement now on the terms of the aid, and I am certain negotiations are already underway,” said Boaventura Sousa Santos, a legal and political expert at the Coimbra University. “I don’t see parliament being called back.”

The center-right opposition Social Democrats helped precipitate the crisis by rejecting an austerity plan by the government last month.

Citigroup warned in a note that “without a clear political agreement on the set of policy measures to implement, the other European countries may be unwilling to sign off the deal.”

Some European partners criticized Portugal.

“They should have requested aid much earlier,” Swedish Finance Minister Anders Borg told a journalists. “We have reason to direct sharp criticism against the Portuguese. They have placed themselves and Europe in a very difficult situation.”

But the market reaction was broadly placid. Shares in Banco Espirito Santo soared 4.17 percent and Millennium bcp rose 4.07 percent. The banking rally helped lift Lisbon’s PSI20 index 1.18 percent.

The yield on Portugal’s benchmark 10-year bond edged up to 8.88 percent from Wednesday’s close of 8.79 percent having fallen sharply on Wednesday afternoon before the announcement.

Portugal to formalize aid request, help seen by June