Portugal may need new ‘soft rescue’ bailout package

Lisbon reportedly negotiating details of ESM credit line

Brussels is preparing a second bailout package for Portugal, according to reports.

The European Commission wants to have the so-called "soft rescue" ready for when Portugal's current bailout expires in the middle of next year, according to an article in Spain's El País newspaper.

The paper cites two unnamed “senior EU sources” as confirming that Lisbon is already negotiating the details of a second credit line, which would come from the European Stability Mechanism.

The new deal would “work as a containment dyke, as a preventative measure to make sure that the exit from the [initial] programme, in May of 2014, is not a heavy burden”, the article said.

Portugal requested a €78 billion bailout in the spring of 2011 as it wrestled with a stagnating economy, soaring debt and a ballooning deficit. Since then the country has pursued an aggressive programme of reforms and austerity recommended by its bailout troika of lenders. However the economy still looks vulnerable as it heads for a third straight year of recession.

Last week the country’s political fragility further undermined Portugal’s attempts to emerge from crisis as two ministerial resignations left the centre-right coalition government in turmoil. Interest on Portugal’s 10-year bonds soared to over 8 per cent for the first time since November on the news and the stock market was rocked.

However, prime minister Pedro Passos Coelho appears to have restored stability, for the moment at least. He has persuaded foreign minister Paulo Portas, who stormed out over economic policy and the pro-austerity profile of the new finance minister, to return to the cabinet in an enhanced role.

However, in light of its ongoing difficulties, Portugal is expected to struggle to access credit on international markets once the €78 billion loan expires.

According to El País's sources, the terms of a new deal would be less demanding than those of the original. However, they foresee difficulties in its implementation due to German elections in September, the need for support from other European partners and possible disagreement between the European Commission and the IMF over terms.

Portugal's Socialist opposition said yesterday a second bailout appeared "inevitable" and party leader António José Seguro said it should be negotiated by a new administration.

The last 24 months, he said, “have been two lost years for Portugal, and Portugal cannot afford to lose two more years”.