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* Greece says hopes Lisbon package will settle markets *
Portugal and Greece talked up the benefits of Lisbon's decision to accept a 78-bln-euro bailout from the European Union and IMF on Wednesday, but the outlook for both countries and Ireland remains highly uncertain.
Portugal's caretaker Prime Minister Jose Socrates announced late on Tuesday he had reached preliminary agreement with the EU, IMF and the European Central Bank for a three-year package of support, including help for Lisbon's banks.
The decision means three of the euro zone's 17 countries are now effectively in financial intensive care — Greece accepted 110 bln euros of bilateral loans a year ago and Ireland signed an 85 bln euro bailout last November — with the long-term fiscal and economic prognosis for all three clouded. Financial markets reacted cautiously but positively to the Portuguese deal, even though most details have yet to be formally announced, including the interest rate on the loans and the precise measures Lisbon must enact in exchange for aid.
Yields on Portuguese government debt fell, with the spread of 10-year government bond yields over German Bunds tightening by around 20 basis points to 675 points, an indication of lower risk, although it remains at extremely high levels.
Socrates, who is seeking re-election at elections on June 5, said he had secured a good deal, although he added: "There are no financial assistance programmes that are not demanding."
Greece, which has raised the possibility of renegotiating elements of its package and which many analysts believe may be forced to restructure its debts despite the bailout, said the aid to Portugal should help settle financial markets.
"This agreement will contribute to reducing uncertainties in the markets, which is something all of Europe needs," said government spokesman George Petalotis.
DIFFERING PLANS
The euro zone has three patients on three different health plans: Greece's loans must be repaid over seven years at an average interest rate of 4.2%, Ireland's over seven years at an average rate of 5.8% (although it is pushing to change the rate), and Portugal's will be finalised in days.
More than a year into the sovereign debt crisis, which at its peak threatened to tear the single European currency apart, EU leaders still find themselves battling to get on top of the problem, rather than bedding down reliable long-term solutions.
Many analysts still expect Greece, whose debts will climb to around 340 bln euros, or 150% of annual output, this year, to have to restructure its debts, either by writing off a portion of them or by rescheduling the repayments.
Such a decision could have widespread repercussions on major French and German banks and the ECB, all of which own large amounts of Greek debt.
But there is a growing sense that Greece will not be able to avoid some form of restructuring, with its debt-to-GDP ratio increasing as the economy contracts and the cost of short-term loans unsustainable — two-year yields stand at 25.7%.
Michael Meister, deputy parliamentary leader of German Chancellor Angela Merkel's Christian Democrats, said on Tuesday there was sense in extending the repayment schedule on Greece's euro zone bailout loans, and ECB policymaker Nout Wellink has said he is open to the idea of extending maturities on all Greek debt.
Portugal must roll over nearly 5 bln euros of debt on June 15. It is hoping that all the details of its bailout will be agreed by then so that it can carry out the refinancing.
