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Portugal reaches bailout deal with European Union

May 3, 2011 |  3:23 pm

Portugal agreed to a deal with the European Union for a three-year bailout loan worth $115 billion, the country’s caretaker government said Tuesday.

The agreement, which also will include financing from the International Monetary Fund, will make Portugal the third debt-strapped European country to take a bailout from the rest of the continent, after Greece one year ago and Ireland in November.

Prime Minister Jose Socrates said on April 6 that Portugal would enter talks with the EU and IMF for financial help after investors demanded ever-higher interest rates to fund the country’s bonds.

From Reuters:

Socrates, who now faces a snap parliamentary election on June 5, hailed the package as a victory, saying it included more lenient terms than those imposed on Greece and Ireland.

The deal gave Portugal more time to meet budget goals which it had previously agreed to.

"The government has obtained a good deal. This is a deal that defends Portugal," Socrates said.

Filipe Garcia, head of Informacao de Mercados Financeiros consultants in Porto, said: "He showed us the bright side of the moon, it is the dark side that remains to be seen, and that includes the interest rate."

Still, the bailout almost certainly will give Portugal access to much cheaper financing than what private investors now require. It remains to be seen what additional economic austerity measures the country will face as part of the deal.

Portuguese bonds have continued to fall in value since April 6, pushing market interest rates higher, despite expectations of an EU rescue. One risk has been that a new government in Finland might reject the bailout. A single EU country's opposition could scuttle a rescue.

Some investors also fear that bailouts are bandages, and that the only way out of Europe’s government-debt crisis is for the most troubled countries to default on their bonds -- most likely via some kind of debt restructuring that could force investors to take a loss.

Portbonds The annualized yield on two-year Portuguese government bonds (charted at right) was 11.82% on Tuesday, up from 8.87% on April 6.

Investors are treating Greek debt as if default is inevitable: Greek two-year bond yields are at 24.79%, up from 16% on April 6.

By contrast, the U.S. pays a yield of just 0.61% on its two-year notes.

In an encouraging sign, Spanish government bond yields have fallen in recent days. One of the EU’s biggest fears is that Spain, a far larger economy than Portugal, Ireland or Greece, also could be forced to seek a bailout if its borrowing costs were to surge.

Spanish two-year bonds were yielding 3.32% on Tuesday, down from 3.58% a week ago.

-- Tom Petruno


Europe ponders letting bailed-out nations default

For the dollar, a "crisis" is relative