Brazil's Lula to Portugal: Don't take bailout

By Barry Hatton

Associated Press

Published: Tuesday, March 29 2011 8:55 a.m. MDT

Former Brazilian President Luiz Inacio Lula da Silva looks at his award after receiving the North-South Prize Tuesday, March 29 2011, at the Portuguese parliament in Lisbon. The North-South prize of the Council of Europe is awarded every year to two personalities in recognition for their efforts promoting North-South solidarity.

Armando Franca, Associated Press

LISBON, Portugal — Brazil's former president Luiz Inacio Lula da Silva has some advice for Portuguese politicians: Don't take the bailout.

But even as the popular Brazilian supported Portuguese efforts to stick to their own plan to clear the country's crippling debts, financial pressures mounted Tuesday as Standard & Poor's downgraded its credit rating of Portugal's bonds to just one notch above junk status.

That will make it even harder for Portugal, one of the 17-nation eurozone's smallest and weakest economies, to raise money on international markets, where nervous investors view the country as a very risky bet.

The rating agency said it lowered its sovereign credit ratings on Portugal to BBB-/A-3 from BBB/A-2 and said Portugal's high debt load and poor growth prospects make it likely the ailing country will need a financial rescue.

Analysts estimate Portugal would need a bailout of up to €80 billion ($113 billion).

Portugal has so far defied calls from other European countries to accept help, even as its financial woes have deepened following last week's resignation of the government.

Portugal's plight could further unsettle investors worried about the eurozone's financial health, re-igniting a sovereign debt crisis that Europe has fought for more than a year to beat.

But Silva said even though Portugal is on the verge of financial collapse it should refuse assistance from the European bailout fund and the International Monetary Fund because that would only increase austerity measures and reduce growth. Portugal has already enacted pay cuts and tax hikes that have triggered a wave of strikes, including a Lisbon subway strike Tuesday, and lowered living standards.

"The IMF won't resolve Portugal's problem, like it didn't solve Brazil's," Silva said late Monday during a trip to Portugal. "Whenever the IMF tried to take care of countries' debts, it created more problems than solutions."

The yield on Portugal's 10-year bond rose again Tuesday, hitting a new euro-era record of 7.97 percent as markets fretted over its ability to settle its debts and demanded high returns on Portuguese loans.

Brazil took a $41.5 billion IMF loan in 1998. Like many emerging markets, the Latin American country has enjoyed an economic boom in recent years. Silva, who left office in January, is credited with generating wealth through a blend of fiscal discipline and innovative investment strategies designed to reduce poverty.

Silva didn't elaborate on his IMF comments, but in the past he has criticized the institution for espousing "orthodox and recessive concepts."

Brazil's current president, Dilma Roussef, said Tuesday her country could come to the aid of Portugal, which in recent years has expanded its Brazilian investments.

"Brazil could help Portugal like Portugal has helped Brazil," Roussef was quoted as saying by the Portuguese news agency Lusa as she began a two-day visit to Portugal.

Portugal's problems are getting worse by the day.

Standard & Poor's said "an uncertain outlook for the (Portuguese) economy and the financial sector" spelled further difficulties.

"The negative outlook reflects our view of the risks to Portugal's fiscal performance from a sustained weakening in domestic demand, as government austerity measures and weak credit stimulus weigh on incomes," it said.

The Bank of Portugal concurred, saying Tuesday that even darker times lie ahead. It forecast the economy will contract 1.4 percent this year in a double-dip recession that has pushed the jobless rate to a record 11.2 percent. The central bank had previously projected a contraction of 1.3 percent this year.

The bank also warned that its calculations didn't include additional austerity measures that will be required to meet the country's debt-reduction goals this year.

It was not clear who in Portugal would even have the authority to request a bailout. The outgoing minority government will likely take a caretaker role with limited powers while the country prepares for elections in late May or early June.

All political parties have rejected a bailout, though they differ on how to lower the national debt.

Portugal is in a race against time. It faces a €4.5 billion ($6.3 billion) repayment of an existing bond in April, which officials say they can meet, and then has to find €4.96 billion ($7 billion) for another repayment in June. It is not clear where the June funds will come from.

____

Alan Clendenning in Madrid contributed to this report.

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