Europe scrambles to rescue Portugal from debt crisis

Reporting from London —  European officials began scrambling to find ways to lend financial aid to Portugal on Thursday after the debt-ridden Iberian nation bowed to market pressure and decided it had no choice but to ask for help.

Lisbon’s announcement Wednesday evening that it would seek outside assistance came as little surprise to many economists, who had predicted such an eventuality for months. Unsustainably high borrowing costs in the last few weeks increasingly made the prospect of some kind of bailout for Portugal more a question of when rather than if.

But the timing of Lisbon’s request for assistance has rendered the situation more awkward than expected, because a political crisis has left Portugal with a caretaker government whose authority to agree to a major financial rescue package is questionable.

Finance ministers from the 27-nation European Union are to meet Friday in Hungary for a previously planned summit that will now be dominated by discussions of how to help Portugal. Possibilities include granting a temporary loan to tide Lisbon over until a new government is installed after elections in early June or ignoring concerns of political legitimacy and sealing a wide-ranging bailout deal as quickly as possible.

In either case, Portugal is set to become the third Eurozone country, after Greece and Ireland, to require emergency funds from its neighbors to stay afloat, despite repeated insistence by Lisbon that it could manage on its own. The Portuguese economy, one of the smallest of the 17 that use the euro, has been plagued by low growth and poor competitiveness.

Analysts expect that Lisbon will ultimately need up to $115 billion in loans and guarantees. The amount would be covered fairly comfortably by the bailout fund created by the EU last year to address the widening euro debt crisis, but would come with stringent conditions that Lisbon rein in public spending.

Last month, Prime Minister Jose Socrates failed to win parliamentary approval for a fourth round of austerity measures within a year, which prompted him to resign and his Socialist Party-led minority government to collapse.

Raoul Ruparel, an economic analyst with the London-based think tank Open Europe, said that signing a big bailout deal with a caretaker government could prove risky. Although some opposition lawmakers have said they would support a request for international assistance, they could end up objecting to details of such an agreement.

“Without a fully fledged government, there’s a big fear that as soon as a new government comes in, they’ll try to renegotiate whatever bailout terms were agreed,” Ruparel said. “It’s just a massive political mess for everyone.”

Adding to Lisbon’s potential problems, the European Central Bank raised its interest rate from 1% to 1.25%, which bank officials said was necessary to keep inflation in check in the Eurozone. While that might make sense for a country like Germany, whose economy is showing strong growth, it will be tough on underperforming nations such as Portugal, which is on the verge of slipping into a double-dip recession.

But the EU can find relief in the fact that many analysts now think the euro debt crisis is likely to stop at Portugal’s doorstep. A rescue for neighboring Spain, whose economy dwarfs those of Portugal, Greece and Ireland, would probably be beyond the EU’s means.

Such a nightmare scenario has receded now that Spanish officials have pursued a hard-hitting austerity program.

“They’ve really tried to cut their deficit and debt by a large amount over the past six months and a year,” said Ruparel, “and they’re getting rewarded for that. It’s looking like they’re going to ride this crisis out.”

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