BUSINESS

Portugal Decides To Seek European Financial Aid, Bank Stocks Rally

04/07/2011 08:18 am ET | Updated Jun 07, 2011

By Shrikesh Laxmidas and Andrei Khalip

LISBON - Portuguese bank stocks rallied on Thursday after the caretaker government requested European financial aid and analysts saying a deal could be negotiated quickly despite a political vacuum during an election campaign.

Lisbon will have to agree to tough austerity targets to obtain the euro zone's third bailout after Greece and Ireland after applying for emergency loans in a turnaround following months of what economists said was denial of economic reality.

German Deputy Foreign Minister Werner Hoyer told Reuters Portugal's decision had averted risks to the country and to the eurozone and there was no risk of a chain reaction, but called for a detailed rescue package to be worked out quickly.

Neighboring Spain, struggling to crawl out of recession after a real estate bubble burst, insisted it would not be next in the bond market's firing line.

"(The risk of contagion) is absolutely ruled out ... it has been some time since the markets have known that our economy is much more competitive," Spanish Economy Minister Elena Salgado told national radio station SER.

Portugal's main center-right opposition party endorsed Socialist caretaker Prime Minister Jose Socrates' decision to request assistance.

Negotiations for financial assistance will take place during the campaign for a June 5 snap general election which will be dominated by the country's critical economic situation as it enters its second recession in three years.

PARTIES, PRESIDENT TO NEGOTIATE?

Constitutional experts and political analysts said that with parliament dissolved and Portugal needing to repay bonds within days of the June vote, the two main political parties and the president could negotiate a deal with the European Union and the International Monetary Fund.

The center-right opposition Social Democrats helped precipitate the crisis by rejecting an austerity plan by the government last month.

"The parties are doomed to come to an agreement now on the terms of the aid, and I am certain negotiations are already underway," said Boaventura Sousa Santos, a legal and political expert at the Coimbra University.

"I don't see parliament being called back," he added.

Viriato Soromenho Marques, a political analyst at the University of Lisbon, said: "I think the European Commission and the IMF would be satisfied with an agreement signed with the main parties and the president.

"It's an exceptional situation, however, so if they do need parliament's approval, it could reconvene," he added.

Citigroup warned in a note that "without a clear political agreement on the set of policy measures to implement, the other European countries may be unwilling to sign off the deal."

Analysts at Portugal's Banco BPI said in a note they expect some details of the bailout package to be announced at a EU finance ministers' meeting on April 8-9 in Budapest.

Portuguese banks won an instant boost after taking the unprecedented step of warning the government on Monday that they might no longer be able to buy government debt -- a move which probably tipped Socrates into seeking help.

Publico daily said "pressure from banks was decisive for the government's request for aid."

"After the madness of the past few weeks, the announcement of the request of external help ends up being a relief," it said in editorial.

Shares in Banco Espirito Santo soared 7 percent minutes after opening, followed by Millennium bcp, up more than 5 percent. The banking rally helped lift Lisbon's PSI20 index 1.4 percent.

Still, the yield on Portugal's benchmark 10-year bond edged up to 8.83 percent from Wednesday's close of 8.79 percent. The bond yield fell sharply on Wednesday afternoon before the announcement.

RISKS TOO GREAT

Socrates announced he was asking for financing from the European Union on Wednesday, saying the risks to the economy had now become too great to go it alone as borrowing rates soared in recent weeks.

"I tried everything, but in conscience we have reached a moment when not taking this decision would imply risks that the country should not take," he said in a televised statement.

Analysts said the decision removed a cloud of uncertainty over the euro zone and has a good chance of ending the spread of debt market crises to other countries in the region.

Senior German lawmaker Volker Wissing, chairman of parliament's finance committee, noted that the Portuguese parliament had had problems accepting austerity measures. "Now they'll be determined from outside," he said.

Socrates cited no figure but a euro zone official estimated Lisbon is likely to need between 60 and 80 billion euros in European and International Monetary Fund loans over three years. Diario Economico newspaper said a bailout of up to 90 billion euros could be expected, but did not cite any source.

The Socialist caretaker government has said it has limited powers and parliament, which EU officials say would normally have to ratify any agreement before disbursal, is dissolved until the election.

Copyright 2011 Thomson Reuters. Click for Restrictions.

Suggest a correction