Wednesday, May 4, 2011

Portugal follows Ireland into bailout

As expected, Portugal has reached a deal with the EU and the IMF for a bailout. The deal is for $116 billion over three years. The Portugese PM, Jose Socrates, keen to avoid the mistakes of the then Irish government appears to be selling the deal to his local constituents as a limited victory in a dire situation. As the WSJ reports:
... José Sócrates described as friendlier than what other rescued euro-zone economies received.

Mr. Sócrates, whose government quit in March but is running the country ahead of a June 5 election, said in a televised statement the accord reached Tuesday won't require the privatization of social security.
Other key details, such as how much the country will have to pay in interest rates for the loans, haven't been disclosed yet, but Mr. Sócrates said the agreement includes a more relaxed deadline for the government to meet budget deficit goals.
Mr. Sócrates said the deal won't include cuts in the minimum wage or in public-sector jobs, measures Ireland and Greece were forced to take. Employees will still receive the extra 13th and 14th months of salary, Mr. Sócrates said.
Negotiations have been taking place in Lisbon for almost three weeks, much longer than the talks held in Greece and Ireland for their respective bailout programs.

"The international institutions recognize that the Portuguese situation isn't like the situation of other countries," Mr. Sócrates said during the address. "The government has managed a good agreement. It is an agreement that defends Portugal," he said.

Under the bailout package, the country will have to reach a budget deficit of 5.9% of its gross domestic product this year, 4.5% in 2012, and 3% in 2013.

That represents a relaxation of current targets where the country had committed to bring its spiraling deficit down to 4.6% of GDP this year, 3% next, and 2% in 2013.
Changes in the budget deficit targets were expected after the Portuguese government said recently its deficit for 2010 was 9.1% of GDP, compared with the 7.3% it had targeted for the year.

Whatever else one might say about Mr. Socrates, he has engaged in a bit of smart negotiating by setting up a situation where he is only a caretaker, thus constraining the ability of the other side to exact costly concessions. The EU and IMF had to factor in enforcement costs post bailout - if the rest of the political spectrum saw the deal as being too harsh there is the risk of renegotiation after a new government is formed. This required some sort of soft agreement to be reached with the likely participants in a new government and the greater range of negotiating positions such an effort required would probably have favoured Portugal's interests. There was also the risk that an unduly onerous bailout agreement would affect electoral preferences with adverse consequences for Portugal in the long term.

Now we can all turn our attention to Spain.