PORTUGAL WAS optimistic at the weekend that the deal to strengthen the euro zone rescue fund would help it avert an international bailout.

According to sources close to the Lisbon government, tough new austerity measures announced on Friday were part of the negotiations that led to euro zone governments reaching their unexpected agreement that night.

It was unclear, however, whether the European financial stability facility would be immediately empowered to buy Portuguese government bonds. Under Friday’s deal, this is only possible “in the context of a programme with strict conditionality”, understood to mean financial rescue-style fiscal oversight by the European Commission and the European Central Bank. The commission and the ECB said they would closely monitor the implementation of Portugal’s new austerity measures “in the context of enhanced surveillance”.

The two bodies worked closely with Lisbon in preparing the package, describing it as “an ambitious policy response” to address “fiscal gaps” in the country’s deficit-reduction programme for the next three years.

EU officials said they expected the rescue fund powers to be used for Lisbon as a last resort. – (Copyright The Financial Times Ltd 2011)