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Bailout delay

March 25, 2011

European leaders have opted to delay a final decision about increasing a bailout fund for countries overburdened by public debt. Portugal, seen as likely to be the next recipient, says it needs no help.

Euro coins
Final details on the eurozone bailout funds are still to comeImage: picture-alliance/dpa

At the end of a European Union summit in Brussels, EU leaders have inched closer to finalizing plans for future rescue funds in the eurozone - but a final decision will have to wait until June.

The issue is once again a focus of attention as speculation mounts that Portugal could be forced to seek EU and International Monetary Fund assistance to deal with its high level of public debt.

An increase in the size of the eurozone's financial bailout mechanism, the European Financial Stability Facility (EFSF) was on the agenda at the summit. The EFSF has a lending capacity of 250 billion euros ($352 billion). Participants at the summit agreed to expand the capacity of the EFSF in June, but political hurdles in Portugal and Finland need to be cleared first.

Following Wednesday's resignation of Jose Socrates as prime minister of Portugal, the country is in limbo as it awaits new elections in the coming months. The new government would have to sign off on an increase to the EFSF.

Jean-Claude Juncker
Juncker called on Portugal's future government to adhere to austerity measuresImage: AP

In Finland, the government has said it is unwilling to sign up to anything before elections there on April 17, since the new parliament would have to approve any agreement.

Luxembourg Prime Minister Jean-Claude Juncker, who also heads the group of eurozone finance ministers, said he thought it unlikely at present that Portugal would ask for financial assistance.

He told German public radio on Friday that although Portugal "obviously has a problem," there were no signs that it would make such a request. He added that it was not up to partner countries to ask Portugal to take such a step.

Germany wins stability mechanism extension

Negotiations continued on the European Stability Mechanism (ESM) as well, although Germany won a major concession that could have further held up progress on finalizing the eurozone's future bailout fund.

The ESM is set to be launched in 2013 to replace the EFSF. As the eurozone's biggest member by population, Germany would contribute the most to the ESM.

Under the current proposal, 80 billion euros of the ESM could be paid in cash. Countries would make half of their cash contributions when the ESM is implemented in 2013, and Germany successfully negotiated that the rest be paid in over five years rather than the originally proposed three.

A Portuguese elephant

However, the elephant in the room during the summit was Portugal, which is teetering on the brink of an international bailout.

Socrates' resignation on Wednesday came after his efforts to pass drastic austerity measures failed. This makes a bailout for Portugal seem quite likely, but any talk of it in Brussels was purely speculative.

Now acting as caretaker prime minister, Socrates is in Brussels for the EU summit. He said that whatever new government is formed, it will stick to commitments made with other eurozone members in terms of fiscal targets.

Chancellor Angela Merkel
Merkel encouraged Portugal to stay the courseImage: AP

After the summit, Socrates repeated that there was no need for a bailout package - and the tough austerity measures that were imposed on previous recipients as part of the deal.

"I know what this meant for Ireland and Greece and I don’t wish it on my country. Portugal must demonstrate that it is a country that can resolve its own problems," he said.

Difference of opinion on risk

Credit ratings agency Moody's on Friday maintained Portugal's rating, despite two other agencies downgrading it to a lower level earlier in the week. The risk ratings are important factors in determining the interest rates at which countries are able to borrow money.

German Chancellor Angela Merkel called on Portugal's political parties to stick to deficit reduction targets after Socrates' resignation.

"It's now very important that all those who speak for Portugal feel committed to the objectives of the program," she told reporters in Brussels. "The mistakes of the past cannot be allowed to return. We will ensure that such a thing does not happen again.

"This is not only important for Portugal, but also for all of Europe and in particular for members of the eurozone," she added.

Author: Richard Connor, Timothy Jones, Matt Zuvela (AFP, dpa, Reuters)
Editor: Nicole Goebel