Portugal will get IMF loans at rates similar to those granted to Greece and Ireland, officials said today, but Lisbon is still waiting for fellow European countries to decide how much they will charge for their slice of a €78 billion bail-out.
The interest rates on the huge loan are a crucial aspect as the ailing country struggles to get free of its massive debts, and Portuguese officials were keen to avoid bail-out terms that might thwart economic growth needed to create jobs.
Both Greece and Ireland, the two other debt crisis victims, have complained about the punitive rates on their bailouts agreed last year. They said the payback terms and deep spending cuts were hurting attempts to restore their fiscal and wider economic health.
Market confidence is so bad in Greece that many investors believe the country will have to eventually renege on its debt deals, a position Portugal is eager to avoid.
Portugal will have to pay interest rates between 3.25% and 4.25% for the International Monetary Fund's portion of its €78 billion bail-out, a senior IMF official said. Those are close to the ones provided to Athens and Dublin.
The IMF's Poul Thomsen said today the lower rate will apply for the first three years of the bail-out, while the higher one will kick in after that. The IMF will supply one third of the overall package, with the rest coming from the EU and euro zone countries.
The EU's representative Juergen Kroeger said the interest rates to be charged for the bloc's portion of the loans has yet to be determined and that that would most likely happen on May 16, when the EU finance ministers meet to sign off on the bailout.
That timeframe could be disrupted by recent elections in Finland, where a euro-skeptic anti-bailout party might be part of the new government and could balk at sending taxpayers money to countries viewed as fiscally lax.
A decision is also being held up by wider discussion within the currency bloc. Euro zone leaders in March agreed in principle to lower the interest rates charged for their bail-outs, but have not yet reached a final deal, partly due to disagreements with Ireland about the rate it is being charged.
Portugal needed the EU/IMF bail-out because it has become virtually cut off from market financing - needed to run its economy and settle its debts - as investors demand extremely high rates for lending money to a country viewed as risky.
The yield on its 10-year bonds was slightly down today but still at an unsustainable 9.6%. Paying those rates denies Portugal funds to invest in economic growth and pay its bills.
Authorities have said the country will not be able to meet debt repayments due in June. Thomsen said the bailout will allow Portugal to stop raising money on debt markets for a little over two years.
That will 'give the government the breathing space' to implement necessary changes to the way its economy is run, he added.
Portuguese banks, which are dependent on liquidity support from the ECB, will be forced to boost their capital buffers sharply - by more than required under international banking rules. If they can not raise the extra money on the market, the government can use part of the bailout to help them out. Stabilising the banks is particularly important as the Portuguese economy goes through recession and bad-loan rates will likely go up.
Portugal's poor economic performance over the past decade, when it posted average annual growth of just 0.7%, is at the heart of its cash problems.
Finance Minister Fernando Teixeira dos Santos said that Portuguese officials had won favourable terms after more than two weeks of negotiations with delegates from the EU, the European Central Bank and the IMF.
He said 'an effort was made to adopt measures that don't hurt growth' and improve Portugal's frail economic competitiveness. 'This is a good bailout programne and an opportunity we can't waste,' he said.
The EU's Monetary and Economic Affairs Commissioner Olli Rehn said the package sought to stimulate growth, cut public debt and ensure stability of the banking sector.
'The Portuguese economy faces considerable challenges and we believe that the bold steps being undertaken will enable it to get back on track,' Rehn said in a statement.
The programme predicts economic contraction of 2% this year and next, with growth returning only in 2013, while the jobless rate is seen rising to 13% from 11.1% now. Public debt is forecast to keep growing through 2013.
'The programme is bold but it is realistic,' the IMF's Thomsen said, rejecting claims that Portugal's package was more lenient than those imposed on Greece and Ireland.
He warned that 'the economy will face significant headwinds' over the next three years as austerity measures bite. The bail-out plan foresees a broad round of tax hikes and welfare cuts that will likely lower living standards in what is already one of western Europe's poorest countries.
Trade unions have balked at more austerity measures after a year of deep cuts as Portugal scrambled to avoid asking for a bailout. Portugal's three main political parties have given their blessing to the deal.
The plan aims to cut Portugal's state budget deficit to 5.9% this year, to 4.5% next and 3% in 2013. Higher taxes and a privatisation programme will help increase revenue, Teixeira dos Santos said.
