Reuters/Lisbon
Portugal faces profound economic problems and must be bold if it is to tackle them successfully, the European Union and IMF said yesterday as they confirmed a three-year, €78bn bailout for Lisbon.
Merkel: bailout must be based on realistic growth targets
The economic aid package will push Portugal into recession for the next two years, require a painful overhaul of labour markets and force the government to sell shares in state utilities, but Portugal’s finance minister said it would also help overturn decades-old structural problems.
“This programme’s success will require a truly national effort,” the EU and IMF said in a joint statement, saying it combined the need to stimulate long-term growth, reduce the deficit and re-stabilise Portugal’s banking and finance sector.
Germany, as the eurozone’s largest economy, pays the largest share of bailouts and Chancellor Angela Merkel said the bailout must be based on realistic growth targets.
Portugal’s government had resisted a bailout for months, mindful of the hardship after it had to call in the International Monetary Fund in the 1970s, when the nation was emerging from decades of authoritarian rule.
But pressure from financial markets, which pushed Lisbon’s cost of borrowing to historic highs, eventually forced the country to concede and it has now followed Greece and Ireland into EU/IMF financial protection.
While three of the eurozone’s 17 member states are now effectively quarantined, there is little evidence that the programmes designed for them are having the desired effect yet.
Greece, whose debts are expected to rise to €340bn ($505bn), or 150% of gross domestic product, this year, has indicated it wants to renegotiate the terms of the €110bn of loans granted to it last May. Originally for three years, the loans are now for seven years and have an average interest rate of 4.2%.
Ireland, which agreed an €85bn bailout in November, wants a lower interest rate on its seven-year loans, which carry an average rate of 5.8%.
Without any adjustment to the programmes, there is growing concern among financial analysts and policymakers that Greece, and possibly Ireland, will be forced to restructure their debts.
That would have a profound knock-on impact on Greek and Irish bondholders, who include many major French, German and British banks and the European Central Bank. Seventy percent of Greece’s sovereign debts are held by foreign institutions.
The ECB is particularly concerned about potential contagion from a eurozone debt restructuring, with Spain, a large holder of Portuguese assets, among possible vulnerable states.
In recent months, Spain has worked to distance itself from others on the eurozone periphery, and to a large extent appears to have convinced financial markets it has done enough to retool its economy, although growth remains slow and unemployment high.
An auction of five-year Spanish government bonds on Thursday suggested Madrid remains on track. It sold €3.35bn at an average yield of 4.549%, up only marginally from 4.389% at the last auction on March 3.
“It’s been a good auction with decent demand. In the last two weeks we’ve seen Spanish spreads come down about 30 basis points, separating itself clearly from Portugal, but also reducing the spread with Italy,” said Antonio Torralba, head of flow trading at BBVA, a bank.
