Global General

Portugal PM says his country will ask for bailout

Updated: 2011-04-07 09:50
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LISBON, Portugal - Portugal has become the third debt-stressed European country to need a bailout as the prime minister announced his country will request international assistance to ease its rapidly worsening financial crisis.

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"I want to inform the Portuguese that the government decided today to ask ... for financial help, to ensure financing for our country, for our financial system and for our economy," Prime Minister Jose Socrates said Wednesday in a televised evening address to the nation.

Portugal has followed Greece and Ireland, other financially troubled eurozone countries, in asking for aid from Europe's bailout reserve and the International Monetary Fund.

Analysts expect Portugal will need up to euro80 billion ($114.4 billion) - an amount bearable for Europe's finances.

Portugal's plight is pressing as it scrambles to raise increasingly scarce funding for its economy. European Commission President Jose Manuel Barroso, a former Portuguese prime minister, said in a statement the request "will be processed in the swiftest possible manner."

A bailout had long been in the cards as Portugal, one of the 17-nation eurozone's smallest and weakest economies, has struggled for months to finance its economy amid the fear of reluctant investors that it won't be able to settle its debts.

Socrates, cornered by his country's mounting financial difficulties, said Portugal was giving up its yearlong battle to avoid asking for a bailout from its European partners.

"This is an especially grave moment for our country ... and things will only get worse if nothing's done," Socrates said, adding that a bailout was "the last resort."

Other European countries have long urged Portugal to accept help in the hope that containing the continent's debt crisis in countries on its outer rim would spare other nations from becoming the targets of market jitters about the eurozone's fiscal soundness.

Over the past year, Portugal insisted it didn't want assistance because the terms of a big loan would lock it into austerity measures for years, lowering the standard of living in what is already one of Western Europe's poorest countries.

Athens and Dublin were wary of accepting accept help for the same reasons until they had no choice.

Portugal's difficulties are different from those of Ireland, where banks became over-leveraged during a real estate boom that went bust, and Greece, where unapparent financial commitments came to light and overwhelmed it with debt.

Portugal's troubles stem from a decade of measly growth - averaging 0.7 percent a year - during which it amassed huge debts to finance its western European lifestyle.

Portugal has gradually lost the trust of its creditors, and investors have demanded increasingly high returns for loans to Portugal that are viewed as risky.

The yield on Portugal's 10-year bonds, which stood at 5.8 percent a year ago, was at 8.54 percent Wednesday - an intolerable level, especially for a country predicted to enter a double-dip recession this year.

The government's resignation two weeks ago, leaving the country without a fully-operating administration until a June election, amplified market fears. Two rating agencies downgraded the country's bonds to one notch above junk level in recent days, triggering alarm among Portuguese and European leaders.

Socrates blamed opposition parties for the bailout request because they rejected an austerity program which the European Commission and European Central Bank had endorsed. The outgoing government had introduced tax hikes and pay and welfare cuts to reduce debt and avert a bailout.

Portugal managed to raise about euro1 billion ($1.43 billion) in a Treasury bill sale Wednesday but investors asked for interest rates over 5 percent to part with their money.

Portugal's short-term borrowing rates rose above what it would likely have to pay for bailout loans as the yield on five-year bonds on the secondary market hit 10 percent. By contrast, Irish average interest rates - currently under review for a decrease - are 5.8 percent for loans with longer maturities.

Though analysts say Portugal probably has enough money in reserve to repay a euro 4.5 billion loan that falls due later this month, they think it would be extremely difficult for it to find almost euro7 billion to roll over a bond and make interest payments in June. On top of that, Portugal still needs to collect funds to keep the country running.

Portugal's bankers have warned they won't be able to keep buying national debt as they wrestle with their own liquidity problems. Portuguese banks have been relying heavily on assistance from the European Central Bank.

As financing has dried up, companies could have problems finding money to pay wages. The unemployment rate last year reached a record 11.2 percent.