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EU clears Portugal bailout as more Greek aid looms

By Gabriele Steinhauser

Associated Press

Published: Monday, May 16 2011 1:16 p.m. MDT

International Monetary Fund Deputy Managing Director Nemat Shafik, left, talks with Belgium's Finance Minister Didier Reynders at the start of an Eurogroup meeting at the EU Council in Brussels, Monday May 16, 2011. European finance ministers are meeting over the coming two days in Brussels, with Portugal and Greece topping the agenda. Shafik, who oversees IMF work in several EU countries takes IMF's Magaging Director Dominique Strauss-Kahn's place at the Brussels get-together.

Geert Vanden Wijngaert, Associated Press

BRUSSELS — European governments insisted on handing out bailouts to fight the debt crisis on Monday, when they signed off on €78 billion ($110 billion) in loans to Portugal and debated giving Greece a second rescue package to avoid a disastrous default.

Most of the terms for Portugal's package had emerged over the past weeks, so ministers quickly moved to discussing whether to give Greece more help on top of last year's €110 billion in loans as it struggles to regain market confidence.

The market pessimism over Greece's financial future — most investors expect it will have to renege on its debt deals — shows how the region is still struggling to get a grip on the debt crisis that has dragged on for more than a year.

The approval of the aid for Portugal was a relatively small step along that way, but showed how so far the European Union is prepared to stick with its existing crisis strategy — namely providing rescue loans to highly indebted countries to give them time to cut government spending and overhaul their economies in the hope that they will start growing again.

For Portugal — as for Ireland, which was bailed out in November — one-third of the rescue loans will come from the International Monetary Fund, while the rest would be split equally among Europe's two bailout funds — one backed by eurozone countries, the other by the EU budget.

A European official previously said the average maturity of the rescue loans will be 7 1/2 years — like the bailouts for Ireland and Greece — and come at an interest rate of around 5.7 percent. That's lower than the rate Ireland has to pay for its bailout.

In their statement, ministers said Monday that the Portuguese authorities agreed to "encourage" private investors to maintain their exposure to the country "on a voluntary basis" and not pull out funds. That was a key demand from Finland, which had a hard time getting approval for the rescue package from its parliament.

A European official familiar with the region's rescue mechanism said that eurozone governments want a commitment from banks not to dump their Portuguese bonds — a request that was also made as part of the bailout of Greece. The official couldn't immediately say whether the request made for the Portuguese rescue went beyond what was asked from investors in Greece. The official was speaking on condition of anonymity because he didn't want to pre-empt a news conference scheduled for later Monday.What was clear, however, was that seeking such a voluntary commitment to maintain exposure fell far short of a debt restructuring — a move that most economists say should be part of Europe's crisis strategy, at the very least for Greece.

Restructuring a country's debts means asking — or forcing — private creditors like banks or investment funds to give it more time to repay or forego some of the money they are owed.

EU officials have so far vehemently denied that a restructuring of Greece's debt was on the table, but on Monday a European finance minister conceded for the first time that such a move was being discussed.

"Of course we discuss all kinds of topics, including restructuring," Dutch Finance Minister Jan Kees de Jager said as he arrived at the meeting. "But in public, we are very reluctant about discussing and debating restructuring."

De Jager did not say whether his country favored a restructuring, but he expressed his frustration with Greece's dire situation.

"At the moment it seems that Greece is not on the right track and it should be first brought back on the right track" before deciding on any new support measures, he told journalists. Greece has to adopt further economic reforms and austerity measures and properly roll out its promised privatization program, de Jager said.

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