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Political fights could unravel Portugal's bailout

By Barry Hatton

Associated Press

Published: Monday, April 11 2011 8:25 a.m. MDT

Portugal's Prime-Minister and Socialist Party leader Jose Socrates attends the closing ceremony of the party's national congress in Matosinhos, on the outskirts of Porto, Portugal, Sunday, April 10, 2011. Socrates resigned late last month after opposition parties rejected unpopular spending cuts and tax increases that the government said were necessary to get the country's struggling economy back on track. On Friday, EU finance ministers agreed to grant financial help to Portugal once the debt-ridden country has signed on to a radical overhaul of its economy.

Paulo Duarte, Associated Press

LISBON, Portugal — Portugal's massive rescue package was threatened on two sides Monday — by internal political squabbling and external bailout fatigue among EU neighbors — and it was not clear whether the proposed deal would last.

A delegation from the International Monetary Fund, European Central Bank and European Commission — bodies that will raise the estimated €80 billion ($115.5 billion) bailout for Portugal and oversee its use — is expected in Lisbon on Tuesday for initial talks.

European finance ministers agreed Friday to put up the money Portugal needs, making it the third country in the 17-nation eurozone to accept a huge financial lifeline.

But a domestic political spat about the scope and terms of the bailout package threaten to slow negotiations and prolong Portugal's plight just as it needs to honor debt repayments amounting to more than €11 billion ($15.9 billion) over the next three months.

"It's not exactly what you'd want when you're in the middle of a disaster of this kind," Vanessa Rossi, an economic analyst at the London think-tank Chatham House, said Monday of the squabbling.

"I'm not sure what they're going to do in the next few weeks if they can't get a deal," Rossi said. "It could just mean that the whole of the financial sector and the government freeze up."

The political feuding is likely to vex European officials who want unanimous political commitment in return for a big loan.

European financial officials are already frustrated with Athens as the Greek government slips behind targets set as part of its €110 billion ($159 billion) bailout last year, and are arguing with Ireland's new government, which is demanding better interest rates on its own €67.5 billion ($97.4 billion)rescue package.

The patience of voters in wealthier European countries, whose taxes are funding the bailouts, is also wearing thin.

"It's a difficult proposition to sell (to voters), that's why the terms of the (Portugal) bailout will probably be particularly harsh," said Diego Iscaro, an analyst at IHS Global Insight.

Portugal has to come up with €4.5 billion ($6.5 billion) for a bond repayment on Friday, then it needs around €7 billion ($10 billion) to repay other debts in June. But it is struggling to raise funds as markets back away from investing in a country plagued by financial difficulties.

EU Monetary Affairs Commissioner Olli Rehn, who hopes a formal bailout deal can be signed by the middle of May, last week urged Portugal's political parties to "realize their major responsibility of overcoming the current difficulties."

The main parties, however, aren't even on speaking terms, and are in a confrontational mood ahead of an early election on June 5.

A rescue package entails surrendering control to foreigners over key aspects of national financial affairs. Portuguese politicians fear they could be punished at the ballot box if they give their blessing to measures that lower living standards in what is already one of western Europe's poorest countries.

The Socialist government quit in anger last month after opposition parties rejected its latest austerity measures, including new tax hikes and pension cuts, that were devised to avoid asking for a bailout.

The main opposition Social Democratic Party, which is ahead in opinion polls, has accused the government of economic mismanagement.

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