ANALYSIS
– May take aid before year-end despite govt protestations
– Market overestimating scale of aid needed
Portugal is likely to need a rescue package of 45-60 billion euros from the European Union and the International Monetary Fund and may not get through the year without seeking a bailout.
Investors believe Portugal will be the next euro zone country after Greece and Ireland to ask for help as its borrowing costs have risen above sustainable levels while its economy lacks competitiveness and growth is very slow.
Portuguese Prime Minister Jose Socrates insists Portugal can survive without a rescue and that his austerity budget of tax rises and public sector wage cuts will keep the ship afloat.
But many economists believe a bailout is just a question of when, not if, and some expect it could happen before the year-end if Lisbon is persuaded to tap EU funds pre-emptively in an effort to stop the euro zone sovereign debt crisis from spreading to Spain.
"It is very likely that they will ask for a bailout — maybe before Christmas depending on market developments in the next days," said Juergen Michels, euro zone economist at Citigroup.
If needed, Portugal, like Greece and Ireland, could get a 3-year plan of loans with an interest rate similar to Ireland — 5.7-6.0 percent, economists and euro zone sources said.
The need for a rescue appeared less urgent on Friday as spreads of Portuguese bonds over benchmark German paper fell thanks to European Central Bank purchases of Portuguese bonds on the secondary market.
This brought yields of 10-year Portuguese bonds down to 5.9 percent — no more than the country would have to pay to borrow from the EU.
Euro zone sources said there were no talks on EU/IMF aid for Portugal and that the market estimates of a bailout of up to 60 billion euros could be too high.
"No package is envisaged and less money would suffice," a senior euro zone source said.
FINANCING NEEDS
Portugal has completed its bond issuance programme for 2010 and its next bond redemption is not due until April, when it has to repay 4.5 billion euros.
But analysts say there is an argument for dealing with Portugal sooner rather than later to avoid Spain getting dragged in to the mire.
While a Portuguese bailout would be manageable, assistance for its neighbour Spain would sorely test EU resources and raise deeper questions about the integrity of the single currency bloc.
In total, according to the Portuguese IGCP debt agency, Lisbon has to repay 9.5 billion euros in bonds next year, 8.5 billion in 2012 and 8.7 billion in 2013, with the total redemptions until September 2013 at 26 billion euros.
According to the Portuguese 2011 budget, next year's net financing needs are 10.75 billion euros, with the budget deficit seen at 10.5 billion euros.
Those two figures add up to nearly 37 billion euros although a three-year financing deal would have to cater for further deficits in 2012 and 2013, which are difficult to estimate precisely at this stage.
The good news, euro zone sources say, is that the banking sector in Portugal, unlike in Ireland where funds for stricken banks strongly boosted the overall bill, did not pose particular problems.
"Portugal or Spain do not present concern in terms of the banking sector," one euro zone source said.
If markets force Portugal to ask for help, the money would come from the European Union and the IMF in similar proportions as for Ireland and Greece — two thirds from Europe and one third from the IMF, one euro zone source said.
Economists also speculate that Portugal could get some kind of stand-by facility, which would suffice to calm markets, but which may never be actually used by Lisbon.
"I think Portugal will have some facility similar to Ireland, something similar to a stand-by arrangement. Something that the government could draw on if needed and maybe banks as well," said Anke Richter, credit research director at Conduit Capital Markets in London.
"They will try to get this type of facility and hope that the markets calm down, so that you don't have to actually draw on it," Richter said.
REFORMS
Judging from the Irish experience, the EU and the IMF would take a few weeks to come up a plan for Portugal, outlining reforms needed in exchange for the money.
In a paper on "Macro structural bottlenecks to growth in EU Member States" from July the European Commission listed several concerns about Portugal, which could, in case of drawing up a reform programme, translate into concrete reform demands.
Apart from fiscal austerity, the paper suggested that Lisbon should aim to improve its competitiveness by making labour laws more flexible to allow for more wage growth moderation or even wage cuts. (For related Breakingviews column, click: [ID:nLDE6B20HU])
Portugal should also tackle labour market segmentation, move towards offering higher added-value goods and services, raise the education level of its labour force and "low educational achievements of current students", the paper said.
It should also implement a revised labour law which makes it easier to sack workers and gives more working hours flexibility.
"A review of the protection of permanent workers and severance payments which are high from a cross-country perspective appears also necessary," the Commission said.
