PORTUGAL’S CARETAKER government last night asked the European authorities to initiate the euro zone’s third bailout as it bowed to months of sustained pressure over its increasingly frail public finances.
The looming intervention, which could see the country borrow as much as €75 billion in an EU-IMF deal, follows the collapse of the country’s Socialist-led government a fortnight ago after rejection of its fourth austerity plan in less than a year.
Caretaker prime minister Jose Socrates said last night that he has already submitted a request for aid to Brussels. In a live address he vowed to secure the best deal possible and said he fought “with all my strength” to avoid a bailout.
Parliament’s rejection of his new austerity measures worsened the financial situation and led to an “inevitable” request for aid, he said. “We have reached a moment when not taking this decision would imply risks that the country should not take.”
The move came amid increasing signs of anxiety in the euro zone about the country’s precarious financial position and its potential to destabilise other weakened countries.
The request for a bailout comes five months after Ireland’s €85 billion EU-IMF rescue deal and 11 months after the €110 billion package to support Greece.
The euro was trading at a 14-month high against the US dollar on the back of expectation that the European Central Bank (ECB) will raise its core interest today.
The application for emergency aid comes as Mr Socrates campaigns for a general election on June 5th.
Pedro Passos Coelho, leader of the opposition Social Democratic Party and tipped to win the election, said his party will support the aid request.
Euro zone officials and diplomats have been expressing concern for weeks that the country would not be able to meet big bond redemptions this month and in June without external assistance.
Although Portugal tried to put money in reserve through short-term bond auctions, a €1 billion auction saw its six-month borrowing costs double in a matter of weeks and its 12-month costs also rising.
With EU finance ministers set to review Portugal’s application at a scheduled informal meeting in Budapest tomorrow, the powers of a caretaker administration to strike a bailout deal with heavy policy conditions remains in question. Also in serious doubt is the political legitimacy of any rescue programme which includes policy measures the parliament rejected only weeks ago.
EU economics commissioner Olli Rehn said the move was “responsible” for the sake of economic stability in Portugal and in Europe
Earlier yesterday, Minister for Finance Michael Noonan said the reaction at home and abroad to the Government’s latest bank bailout plan has shown “confidence is being restored” in Ireland’s financial standing. Deposit withdrawals from the two main banks, Bank of Ireland and AIB, had fallen “very significantly” since last Thursday’s stress test results, Mr Noonan told the Dáil.
Mr Noonan gave several examples in the Dáil of the positive reaction to the stress test results. The value of Bank of Ireland shares increased 45 per cent, while AIB shares had also risen. The interest rate on 10-year Irish Government bonds fallen back below 10 per cent.
Credit rating agency Standard and Poor’s said the outlook for Ireland was “stable”, removing the immediate likelihood of a further downgrade in the country’s credit rating.
Separately yesterday, the head of financial regulation Matthew Elderfield said losses may be imposed on senior bondholders at Anglo Irish Bank and Irish Nationwide Building Society if the cost of the two failed institutions rises above the current €34 billion bill.
Two leading German commentators have accused the Berlin government of being disingenuous about the role of German banks in helping to drive the Irish financial crisis.
German philosopher Jürgen Habermas and former foreign minister Joschka Fischer said the EU is facing “creeping death” unless Germany seizes the euro zone crisis as a chance for final European integration.