Markets boosted by Portugal bailout

In return for financial help from the European Union and the International Monetary Fund, Portugal must slash its budget deficit from 9.1% of GDP to 5.9% this year The financial markets have welcomed the €78bn (£70bn) bailout agreed for Portugal on Tuesday night, with City experts hopeful that the deal will allow Lisbon to repair its finances without defaulting on its debts. Although the precise terms of the rescue deal announced by caretaker prime minister José Sócrates will not be agreed for another two weeks, news of the deal sent the euro rallying on Wednesday. Portuguese bond prices also recovered some ground in early trading, while shares on the Portuguese stock market moved higher in the face of a widespread selloff across Europe. In return for financial help from the European Union and the International Monetary Fund, Portugal must slash its budget deficit from 9.1% of GDP to 5.9% this year, and then reduce it to 3% by 2013. “Portugal appears to have been given more time which is promising, but it still has a tough task ahead,” said Gary Jenkins, head of fixed income research at Evolution Securities. Jane Foley, senior currency strategist, pointed out that both targets are less onorous than the government’s previous goals. “The market will be relieved the plan has been outlined before Portugal’s June bond redemption deadline,” said Foley. “News that Finland may be closer to supporting the bailout despite the opposition of the True Finns party is also positive.” The eurosceptic True Finns party won 39 seats in Finland’s 200 strong parliament last month, and has lobbied against bailing out Europe’s weaker countries. The interest rate paid by Portugal for the rescue package is expected to be agreed at a gathering of EU ministers on 16and 17 May. Sócrates resigned in March after the Portuguese parliament rejected his austerity programme. However, like Greece and Ireland, Portugal will have to accept significant cutbacks and tax rises in return for outside help. Jenkins pointed out that: “The Prime Minister in his television address set out a few things the package did not include, so no cuts to minimum wages or public sector pay, no public sector dismissals and no change to the retirement age. But he was short on what measures the package did include, though it is expected to include further privatisations, recapitalisation of the banks as well as a combination of government spending cuts and tax increases.” Portugal is due to auction up to €1bn of three-month government bonds on Wednesday morning. The yield, or interest rate, on its 10-year debt fell on Wednesday in response to the bailout deal to around 10.06%. This level is still generally seen as unsustainable, and is also several percentage points higher than the interest rates levied on Ireland and Greece’s own rescue deals. The euro rose to around $1.4854 against the dollar, and also traded above 90p against the pound. European debt crisis European banks Portugal Europe Graeme Wearden guardian.co.uk

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