10th Aug 2022

EU: All Portuguese parties must back bailout-austerity package

European Union finance ministers meeting in Godollo, Hungary on Friday (8 April) have given the green light to launch talks not just with the caretaker government of Portugal but also the "main opposition parties" for a bail-out of around €80 billion.

In return for the financial assistance, the caretaker government and opposition must agree to an "ambitious" three-year programme of liberalisation, privatisation and spending cuts.

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  • A medal made by the conservative opposition party, the Partido Social Democrata (Photo: Pieter Musterd)

Centre-left Prime Minister Jose Socrates' hope of avoiding a full multi-year bail-out package on the model of those imposed on Greece and Ireland, with its attendant abdication of sovereign control over economic decision-making, was dashed.

EU economy chief Olli Rehn told a press conference the deal "on the magnitude" of €80 billion, which will also involve the IMF, also to the Portuguese prime minister's chagrin, would be a "fully-fledged - most likely three-year programme" with "strict conditionality" attached.

Ahead of negotiations, the EU has outlined the three pillars it expects to find in an agreed bail-out memorandum: spending cuts; liberalisation of labour markets - including "an ambitious privatisation programme"; and measures to maintain the liquidity and solvency of the financial sector.

The programme is to go further than the package of cuts targetting healthcare, pensions and welfare that the Portuguese parliament rejected on 23 March, provoking the resignation of the government.

Nevertheless, according to Rehn, the defeated austerity programme will now form the "starting point" of the new austerity programme.

"We note that part of this was not approved by parliament ... therefore it cannot be exactly the same," he continued.

Finnish finance minister Jyrki Katainen of Finland, was even more frank about how Portugal must enact more thoroughgoing changes than had been rejected: "The package must be harder and more comprehensive than the one the parliament voted against."

Details of the structural adjustment have yet to be assessed. The commission together with the European Central Bank and the IMF "will start straight away with the Portuguese authorities," Rehn added, heading to Lisbon to "open the books", a task that is expected to take two weeks.

After financing needs are established, the commission will deliver a draft austerity programme to EU finance ministers to approve. He said he hopes the work will be completed by 16 May.

But everyone involved will be working against the clock: "Portugal will manage its financing needs in April and May while June is more challenging."

Cross-party agreement

The EU is also to attempt to cobble together an agreement between the caretaker Socialists and "the main opposition parties" to lock in any future government to the austerity programme.

"In the context of a difficult political situation and forthcoming elections, it is essential in Portugal to reach a cross-party agreement among the main parties ensuring that such a programme can be adopted in May."

However, despite the announcement of an agreement on the subject, following the meeting, the Portuguese finance minister declared that his government would not negotiate with the opposition and that it was the responsiblity of the EU and the IMF to do so.

In response, Rehn warned the country: "I trust all political parties of government and opposition realise their major responsibility in overcoming their current difficulties bothe for the sake of their own citizens and financial stability in Europe."

EU officials would not be drawn on which opposition political parties would be chosen to participate in the talks, or how they would be picked.

However, it is thought that the two parties to the left of the Socialists who reject outright all austerity measures would not be involved. The Left Bloc and the Communists together enjoyed support of a fifth of the population until the most recent poll, which put the combined austerity-rejectionist fraction in the parliament on 14 percent. Public sector unions on Friday meanwhile also announced they are to go on strike on 6 May to kick "the IMF out of Portugal".

Defeat for bridging loan request

Germany and its hawkish core-eurozone alliance flatly refused Socrate's request for a bridging loan to carry the country past its general election in June in return for a one-year austerity programme. Berlin's position was also backed up by the European Commission.

Up until this point, analysts have said that a caretaker administration does not have a democratic mandate to negotiate anything other than the terms of a short-term aid package.

But the mood was angry heading into the meeting, with several ministers publicly furious at Socrates for leaving a request for a bail-out to this point and continuing to inject uncertainty into the eurozone, and little sympathy for the democratic niceties of Portugal's situation.

Dutch finance minister Jan Kees de Jager told reporters: "The procedures could have been better. They should have asked for a bail-out at the same time as Ireland [last November]."

Swedish finance minister Anders Borg, in an unusually public dressing down - particularly from a country which lies outside the eurozone, said heading into the meeting there have been "some very irresponsible policies in Portugal."

The comments echo even stronger language the minister used on Swedish Radio: "We have reason to be very critical of the Portuguese government. This is a decision that should have been made in November, December."

"It's been obvious for a long time that this country can't stand on its own two feet".

Commissioner Rehn did however concede: "We may have to do some final adjustment after 5 June."

ECB pulled plug on Portugal

It is also now emerging that out of frustration at the Portuguese prime minister's refusal to apply for a bail-out, the European Central Bank may have deliberately pulled the plug on the country's economy this week in order to force Socrates' hand.

On Monday, Portuguese banks announced they would stop buying government bonds if Lisbon did not seek a rescue, a move widely viewed domestically as the development that pushed Socrates into saying on Wednesday evening he was to request a bail-out.

On Thursday, the head of the country's banking association, Antonio de Sousa, said that he had "clear instructions" from the ECB and the Bank of Portugal to cut off the tap.

"When it became clear that state financing needs implied more funding by banks, banks said this could not be done because they had clear instructions from the Bank of Portugal and ECB to do the opposite, to diminish their exposure and not increase it," he said, according to Reuters.

ECB chief Jean-Claude Trichet on Friday however denied any role in the cut-off: "We didn't force banks or various political forces to do anything."

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