PREVIEW-Euro finmins to grill Portugal over econ situation

By Jan Strupczewski

BRUSSELS, April 4 (Reuters) – Euro zone finance ministers
will this week discuss Portugal’s options to solve its debt
problems under a caretaker government, including whether it is
capable of requesting EU financial aid, a euro zone source said.

Finance ministers from the 17 countries using the euro meet
on Friday in Budapest for informal talks, which will also
include the economic situation in other euro zone countries hit
by the sovereign debt crisis — Ireland and Greece.

Two other euro zone source confirmed that the discussions
would focus on the three peripheral euro zone countries.

The situation in Portugal, whose borrowing costs have
rocketed to an unsustainable 8.80 percent for benchmark 10-year
bonds (PT10YT=TWEB: Quote, Profile, Research) after the collapse of the government last
month, is likely to take up much of the Friday morning
discussions, one of the euro zone sources said.

“There is very chaotic communications coming out of Portugal
on the necessity, or not, of entering into an EU programme,” the
source, who has detailed knowledge of preparations for the
talks, said, speaking on condition of anonymity.

Given the unsustainably high cost of financing on the market
for Lisbon, some euro zone countries have pressured Portugal to
seek a programme of financial assistance from the EU and the
International Monetary Fund, like Dublin and Athens have.

But Jose Socrates’ government has repeatedly rejected that
possibility and the sources said it was unclear what power the
caretaker government that has taken over since Socrates’
resignation would have before new elections on June 5.

“We would like to have an explanation by the Portuguese
finance minister what the economic and public finance situation
actually is,” the euro zone source said.

“Then, once this explanation is given, we also need to have
a serious discussion on the room for manoeuvre for this caretaker
government — what it can and cannot decide,” the source said.

“Are they legally capable of asking for a financial
programme or not? This is different from what they want or don’t
want to do,” the source said.

“They should stop messing around with us and tell us what
the situation is, both in terms of the economic analysis and in
terms of the political situation. That will take up a large part
of the meeting on Friday,” the source said.

The sources said it was clear that Portugal had enough cash
to cover a peak in financing need of 4.3 billion euros in April.

“We have discussed this over and over again and we are
confident that the financing needs in April will be met.”

While there were no talks so far on Portugal asking for an
EU/IMF bailout, and none were likely this week or in Budapest,
talks were under way to establish what the situation of Portugal
really was, one source said.

“We are asking them to explain the situation to us to have
clarity on whether the prime minister actually believes his own
stories. We are trying to disentangle the economics and the
politics of this, and it is not so easy,” the source said.


The ministers will also discuss plans by Irish authorities
to recapitalise the banking sector after a new round of stress
tests showed last week it needed 24 billion euros of capital.

The money has been allotted to Ireland already under the
bailout programme last November, but the implementation
timetable might need tweaking, the source said.

“The stress tests have not revealed anything new, anything
that would not be contingently covered by the programme,” the
source said.

Ireland has earmarked 35 billion euros to stabilise its
banking sector under the EU/IMF programme. Part of the financing
will come from the European Financial Stability Facility (EFSF).

“In that sense the programme does not need to be modified,
but maybe if we discuss the calendar, the EFSF plans to issue
new bonds may have to be adjusted to when the Irish government
wants to implement certain measures, which then may have
implications on the schedule of disbursement,” the source said.

There would be no discussion of lower interest on EFSF loans
to Ireland in Budapest, three euro zone sources said.

“There is no chance in hell that finance ministers will
decide anything on the interest rate, because this is being
discussed at the level of heads of state and government,” one
euro zone source said.

Ireland wants to secure cheaper emergency financing from the
euro zone, as Greece has done, but France and Germany have
demanded a higher corporate tax rate in return, a move Dublin

“Ireland will not die if it continues to pay higher interest
for a little longer and by then the others may have forgotten
some of the acrimony over this,” the source said.

The ministers are also likely to seek an explanation from
Greece over press reports that its budget deficit for 2010 was
revised upwards, the sources said.

(Reporting by Jan Strupczewski, editing by Patrick Graham)

PREVIEW-Euro finmins to grill Portugal over econ situation