|Thousands of Portugese marched in protest at austerity measures expected under the bailout plan [Reuters]|
Euro zone finance ministers unanimously approved a $110bn (78bn euro) bailout for Portugal, the third euro zone country to secure a rescue package.
As a condition of the deal that was announced in Brussels on Monday, the euro zone financial leaders insisted that Lisbon ask private bondholders to maintain their exposure to its debt.
It was the first time a euro zone country has explicitly sought voluntary pledges from private creditors not to sell down their debt holdings and reflects growing pressure on EU leaders to broaden out the burden of bailouts from taxpayers to the banks that hold so-called peripheral euro debt.
Finland, which must secure parliamentary approval of the bailout for it to go ahead, had insisted on some form of private sector involvement as well as the launch of an ambitious privatisation programme by Portugal.
Lisbon cannot force debt holders to maintain their exposure so it is unclear whether the pledge will have more than a symbolic impact.
Portugal is the third euro zone country to secure a rescue package after Greece and Ireland last year.
In a statement, the finance ministers confirmed that two thirds of the funds, which will be disbursed over a three-year period, would come from EU facilities, with the remainder coming from the IMF.
“At the same time, the Portuguese authorities will undertake to encourage private investors to maintain their overall exposures on a voluntary basis,” the statement read.
IMF head Dominique Strauss-Kahn, who has been at the heart of negotiations on all three euro zone bailouts, had been due to attend the meeting but was detained by police in New York over the weekend on accusations he tried to rape a hotel maid.
As the ministers were meeting, the Frenchman who had been expected to challenge French president Nicolas Sarkozy in next year’s election was making his first appearance in court, where he was refused bail. He has denied the charges.
Should Strauss-Kahn be forced to resign his post, it would probably not affect any of the bailouts in the short term, but it could have a longer term impact if it leads to a change in the nature and style of the IMF’s involvement.
In his nearly four years at the IMF, Strauss-Kahn is seen as having made the organisation less doctrinaire when it comes to providing assistance to struggling countries.
With the Portugal deal out of the way, European governments are expected to focus their energies on Greece in coming weeks.
They have acknowledged that Athens is unlikely to be able to return to the capital markets for funding next year, as envisioned under its $156 billion (10 billion euro) rescue sealed last year, and must come up with new ways to relieve its burden.
Some politicians are arguing that private holders of Greek debt should be asked to extend the maturities of their bonds, but European Central Bank (ECB) officials have warned against such a “reprofiling”, which would probably not allay fears of a more aggressive restructuring in the years ahead.
“The problem is that if you have only an extension of maturities, it would not have a big impact on sustainability of the (Greek) debt,” ECB Executive Board member Bini Smaghi told the Wall Street Journal in a video interview.
Sources told Reuters before the meeting that EU and IMF inspectors would tell the ministers that they were not happy with budget steps proposed by Greece and that more talks were needed on fiscal and privatisation plans.
Portugal’s bailout will involve loans to provide budget support, aid with reforms and help with recapitalising banks.
Ministers are expected to agree that Portugal will pay an interest rate of between 5.5 and 6.0 percent for its loans.
That is in line with the borrowing cost set by the initial euro zone agreement on emergency funding through the European Financial Stability Facility (EFSF), rather than a more favourable EFSF lending rate EU leaders suggested in March.
Euro zone leaders lowered Greek loan rates, originally about 5.2 per cent, to 4.2 per cent in March. But the 5.8 per cent on loans to Ireland was not cut, because of a dispute over its company tax rate, which France and Germany see as too low.
Ministers, including the Irish finance minister, said there would be no movement on Ireland’s loans on Monday.
Despite its lower borrowing costs, Greece is pushing for an extension of the maturities on its loans and possibly an even lower interest rate, because it is struggling to finance itself, with total debts now at 150 per cent of GDP.
Many analysts expect Greece to have to restructure its debts at some point, despite repeated denials from European policymakers.