Portugal aid talks enter key phase under Finnish cloud

By @ibtimes on

A crucial new phase of Portugal's bailout negotiations began under a cloud on Monday after an anti-euro party in Finland that has vowed to derail the pending rescue scored strong gains in an election.

Portuguese debt premiums rose to new record highs in early trading, also pushed up by talk of Greek debt restructuring, which Athens again denied.

Representatives of the European Commission, the European Central Bank and the International Monetary Fund are in Lisbon to set the terms for what would be the euro zone's third bailout in a year after multi-billion euro deals for Greece and Ireland.

They examined Portugal's public accounts last week and on Monday began nitty-gritty policy discussions with the caretaker government. The IMF delegation is headed by Dane Poul Thomsen who oversaw bailout talks in Greece.

The officials made no comments as they arrived at the finance ministry on Lisbon's grand Commerce Square by the Tagus -- a reminder of the country's former imperial grandeur.

The bailout is expected to total 80 billion euros.

The aim is to come up with a radical economic reform plan -- including privatizations, labor market reforms and steps to shore up fragile banks -- by mid-May, just weeks before the government faces an acute funding crunch and a snap election due on June 5.

Regardless of how those talks go, the country now faces a new threat from a fellow euro zone member that lies some 3,000 km (1,900 miles) to the north.

In an election in Finland on Sunday, the euroskeptic True Finns party made huge gains to come in a close third and may now be in a position to block or at least complicate Portugal's bailout if it ends up joining the next government in Helsinki.

The package that is there -- I do not believe it will remain, said True Finns leader Timo Soini.

The premium investors demand to hold Portuguese benchmark 10-year bonds rather than safer German Bunds rose to new euro lifetime highs of 599 basis points on Monday from Friday's 583 bps, and the 10-year yield hit 9.34 percent.

There is increased support to euro-skeptical parties and this may make EU leaders a bit more cautious going forward when negotiating attempts to solve the debt crisis, said Niels From, chief analyst at Nordea. This is weakening the firepower of the euro system.

FUNDING CRUNCH

It may take weeks to know whether the True Finns party can back up its threat, but its success in the election potentially poses a huge risk to Lisbon, which has said it will run out of funds to keep the country running in June.

Any delay in approving the bailout deal beyond the mid-May target could leave European leaders scrambling to find other means of funding for Portugal, a country of 10.5 million that has been targeted by investors during the euro zone crisis because of its high debt levels and uncompetitive economy.

Unemployment in Portugal is at three-decade high of over 11 percent, education levels are well below the euro zone average and the country depends heavily on industries like textiles, where competition from powers like China is fierce.

Even before the Finnish vote, Portugal faced significant political obstacles to sealing a deal with the EU and IMF.

Prime Minister Jose Socrates is serving in a caretaker capacity since resigning last month following the rejection of his latest austerity plans by opposition parties in parliament.

With an election due on June 5, the rescue deal must be approved not only by his government but by the main opposition party, the Social Democrats (PSD), who are leading in the polls in the run-up to the vote.

Bailout talks could be complicated further by what Portuguese weekly Expresso said were disagreements between European officials and the IMF on loan conditions.

Expresso said the IMF was insisting on a lower average interest rate on the bailout loans for Portugal than Greece and Ireland initially received and wanted the aid to last four rather than three years to give the Portuguese economy additional time to recover. It said richer European nations were resisting the idea, fearing a public opinion backlash at home.

An IMF spokeswoman declined to comment on the report that did not cite any sources.

(Additional reporting by Miguel Pereira, editing by Mike Peacock)

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