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News : EU Economy Last Updated: Apr 8, 2011 - 7:25 AM

Portugal's Prime-Minister José Sócrates applies for bailout from European Union
By Finfacts Team
Apr 7, 2011 - 6:01 AM

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Portugal's caretaker Prime Minister José Sócrates, Taoiseach Enda Kenny and German Chancellor Angela Merkel, Brussels, March 24, 2011.

Portugal's Prime-Minister, José Sócrates, on Wednesday informed the President of the European Commission, José Manuel Barroso, of the intention of Portugal to ask for bailout funds, making it the third Eurozone member country after Greece and Ireland to need external assistance with its sovereign debt problems. 

Barroso, a former prime minister of Portugal, said the request will be processed in the swiftest possible manner, according to the rules applicable. He reaffirmed "his confidence in Portugal's capacity to overcome the present difficulties, with the solidarity of its partners."

Portugal is facing a general election on June 5th following the failure of the government last month to win parliamentary approval for a fourth austerity package that had been agreed with the European Commission.

On Wednesday night, Prime Minister Sócrates said the rejection of the austerity package "was the wrong signal at the wrong time."

Seeking to pin the blame for the bailout on opposition parties who had triggered the the collapse of his minority government,  Sócrates added: "Over the last year I struggled every day to prevent this from happening. The truth is we had a solution and it was discarded."

Portugal on Wednesday sold about €1bn worth of bonds but at elevated interest rates. Meanwhile Spanish and Irish bond yields fell Wednesday.

The debt agency in Lisbon agreed deals at yields of 5.1% and 5.9% to borrow money for six and 12 months, compared with 3% and 4% rates it paid last month.

On Tuesday, ratings agency Moody's downgraded Portuguese government debt by one notch, to Baa1 from A3 - - just above the investment grade threshold.

Portugal has debt of €4.2bn maturing on 15 April and a further €5.0bn in June.

Moody's said Tuesday's downgrade was "driven primarily by increased political, budgetary and economic uncertainty."

Last week, the Portuguese government admitted it had missed its budget deficit target for 2010.

Moody's said the additional uncertainty in the country heightened the risks that "the government will be unable to achieve ambitious deficit reduction targets" in the next three years.

Jornal de Negócios, a business daily, says: "Cuts in wages and allowances of civil servants, reduced pensions, increased taxation and dismissal of civil servants are some of the measures the IMF demanded that Greece and Ireland when these countries have negotiated their foreign aid.

In April 2010, Greece has appealed directly to IMF assistance because there was still an EU rescue fund, and from the austerity measures subsequently negotiated and implemented actions are included in four major sectors: wage cuts, restructuring of pensions, tax reform and a privatization plan."

Portugal has grown at an average annual rate of less than 1% in the past decade and unemployment rose to 11.1% as the economy shrunk for the first time in a year.

Portugal had a budget deficit/GDP ratio of 8.6% in 2010 compared with an official 7.3% target.

Portugal may initially apply for a bridging loan until a new government has been formed and negotiates a deal with the EU and IMF.

CNBC's Simon Hobbs has the details on Portugal's need for foreign aid:

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