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Portugal under pressure to seek EU/IMF aid

Source: Reuters - Sun 9th Jan 2011

Pressure is growing on Portugal from Germany, France and other euro zone countries to seek financial help from the EU and IMF to stop the bloc's debt crisis from spreading, a senior euro zone source said on Sunday.

Some preliminary discussions on the possibility of Portugal asking for help if its financing costs on markets become too high have taken place since July, the source said.

No formal talks on aid have started yet, a number of euro zone sources said, but the pressure was rising in the Eurogroup, which brings together euro zone finance ministers.

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"France and Germany have indicated in the context of the Eurogroup that Portugal should apply for help sooner rather than later," the senior source said, adding Finland and the Netherlands had expressed similar views.

Earlier on Sunday, a Portuguese government spokesman denied a German magazine report that Lisbon was under pressure from Berlin and Paris to seek a bailout from the European Union and International Monetary Fund.

A German Finance Ministry spokesman said earlier: "Germany is not pushing anyone to accept a bailout."

Leading Portuguese newspaper Publico joined the ranks of those who think a bailout is inevitable on Sunday. "Only a miracle will save us from the IMF," a Publico editorial read.

Many policymakers hope EU/IMF financing for Portugal would ring fence the euro zone debt crisis, in which Greece and Ireland have taken bailouts.

Before Ireland got its 85-billion-euro bailout late last year there were reports of pressure from core euro zone countries for Dublin to accept an aid package.

Lisbon has repeatedly denied it is facing pressure or needs a bailout in recent months - there have been frequent reports that such help may become necessary.

Help for Lisbon would aim to protect Spain, which might be next in line, but whose financing needs would stretch current euro zone aid capabilities to the limit.

"The real battle will be the battle of Spain - but there I think we have much higher chances of success," the source said.

Asked to estimate the possible size of a program Portugal could need, the source said: "More than 50 billion euros and less than 100 billion euros, say between 60 and 80 billion, but this is off the cuff, because we don't know the needs of the Portuguese banking sector."

Portugal is viewed by many economists as the peripheral euro zone country most likely to follow Ireland and Greece as it grapples to cut its debts and borrowing costs.

A Reuters poll of economists last week showed almost all expect Portugal to need a bailout.

"Portugal has not requested it - you cannot force somebody to want something," a second senior euro zone source said. "Strictly arithmetically speaking, it would not be necessary, but given the hysterics of some market participants it may become useful."

The growing pressure on Lisbon follows a sharp rise in Portuguese 10-year bond yields at the end of last week to euro lifetime highs above 7 percent, as investors worried about the prospect of up to 1.25 billion euros of bond supply it will offer at an auction on Wednesday.

yield of five-year Portuguese bonds on the secondary market is 6.43 percent and 10-year paper trades at 7.26 percent. Economists say a key question for Portugal is how long it can sustain the high yield levels, and the auction will be an important gauge of that.

"That auction will be very closely watched," the first source said.

There had already been pressure on Lisbon to ask for financial help before an EU leaders' summit in mid-December, but to no effect, the first source said, because Portuguese Prime Minister Jose Socrates opposes such a move.

"There are still memories in Portugal of the IMF program of the seventies, and the loss of sovereignty that it entails," the source said.

Asked when Portugal could be forced to turn to the EU and the IMF for help, the first source said this depended on yield developments, the position of Socrates and how much pressure German Chancellor Angela Merkel and French President Nicolas Sarkozy were willing to apply.

The five-year paper is above the cost of funding that Portugal would get under EU/IMF aid, the source said.

Portuguese opposition leader Pedro Passos Coelho said on Sunday if the country was forced to seek foreign financing the government would not be in a position to continue ruling as its policies had failed.

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