Portugal’s pick me up

Civitas, 18 May 2011

After a tumultuous few weeks the Portuguese bailout has come one step closer to fruition, with Eurozone ministers having finally agreed the finer details of the three-year €78 billion loan intended to ‘safeguard financial stability in the euro area and the EU as a whole’.

It certainly hasn’t been the easiest of paths getting to this point. For one, the disintegration of the Portuguese government back in March, just days before their request for external assistance, set the negotiations off to a rocky start. José Sócrates’ government collapsed after the opposition party rejected their austerity package, leaving a caretaker government running Portugal. This meant that any bailout agreement had to be agreed to by all Portuguese political parties; no easy feat, especially when the EU-IMF austerity measures promised to be more severe than the package originally rejected.

Secondly, the bailout of a Eurozone state requires the agreement of all 17 Eurozone members, and there had been mounting concern regarding Finland’s cooperation. Finland’s April parliamentary elections saw the EU-sceptical party True Finns hugely increase their share of support to 19% (taking 39 of the 200 parliamentary seats). Finland also happens to be the only Eurozone country which requires the backing of its parliament to approve a bailout, and the True Finns definitely do not support the bailout. On 12 May however, the two main parties moved to support the bailout, essentially giving the go-ahead to Eurozone ministers a week before their meeting. Finland is particularly important to have on side because of its triple A credit rating, crucial for securing good borrowing rates from the international market.

If there were sighs of relief over Helsinki’s decision to proceed it could only have been short lived as it emerged that the IMF leader, Dominique Strauss-Khan, had been arrested over the weekend. A key mediator in the negotiations, his detention would have paralysed the deal, were it not for Deputy Managing Director, Nemat Shafik, stepping into his shoes for Monday’s meeting. There has since been mounting pressure on the IMF leader to resign.

However, despite the month of difficulties, Eurozone ministers reached a number of important decisions on Monday. The bailout burden of €78 billion will be divided equally between the European Financial Stability Facility (EFSF), the European Financial Stability Mechanism (EFSM) and the IMF, all paying €26 billion each.  The UK will be contributing £4.3 billion to the package as all EU members, regardless of Eurozone membership, are tied in to contributing to the temporary mechanism.  Although Finland has backed the deal, it has set specific conditions not seen in the previous bailouts, namely that private investors should not sell down their holdings on bonds but instead maintain their exposure to debt (in the hope of easing some of the burden on taxpayers). Finland also stipulated that extensive privatisation must be encouraged.

Portugal’s bailout, like those before, is certainly no magic pill. Unemployment remains at a 30-year high, the economy is predicted to shrink by 2% this year and the government is in limbo. Finland’s government, once finalised, will almost certainly insist on stricter conditions than seen with previous loan packages. One can only hope that the Portuguese elections on the 5^th June will deliver a government determined to implement the reforms and restructuring so badly needed to get the country back on track.