Wednesday, 4 May 2011

Portugal bail-out

Portugal needs financial assistance worth 78bn euros ($116bn; £70bn) (ouch!) and has been working on a deal with European Union (EU) and International Monetary Fund (IMF) for the past 3 weeks.

Basically, Portugal will be given more time to reach its budget deficit targets than had previously been expected. The interest rate on Portugal's bailout loan is expected to be set at a meeting of eurozone finance ministers in mid-May.

Now, the deficit will be cut to 5.9% of GDP this year, 4.5% in 2012 and 3% in 2013. Portugal previously aimed to reduce the deficit to 4.6% this year, 3% in 2012 and 2% in 2013.

Well, this sounds lovely but nothing is ever that easy!

Portugal was the third eurozone country to have to ask for a bail-out, after Greece and the Irish Republic. BBC business editor Robert Peston says there are fears that Greece's rescue is unravelling and that the Portuguese bail-out will not be the eurozone's last.

Furthermore, Mr Socrates resigned as Prime Minister of Portugal last month and so this deal needs broad cross-party support. The backing of the opposition Social Democrats (PSD), who are ahead in the polls, for the bailout is crucial to guarantee that the EU signs off on the deal. They stated that they will give their opinion later today or tomorrow.

Portugal have already managed to raise €1.12bn euros in three-month treasury bills today with demand almost doubling the offer, but investors insisted on a 4.65% interest rate – up from 4.05% two weeks ago (ouch again!)

Jonathan Loynes, chief European economist at Capital Economics in London, said the bailout might not be enough to stave off restructuring: "It won't put an end to speculation that – along with Greece and perhaps others – it will sooner or later need to undertake some form of debt restructuring."

 Watch this space to see what PSD decide!

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