Portugal Bailout Doesn't Protect Country From Higher Interest Rates

May 5, 2011, 08:19 by R.E. Christian

Portuguese officials were forced to offer higher rates to sell the country's short-term debt Wednesday despite reaching a deal on a bailout, analysts said.

The auction, which garnered $1.6 billion, came hours after caretaker Prime Minister Jose Socrates announced he had agreed to terms for a loan package of $116 billion from the International Monetary Fund and the European Union, The New York Times reported Wednesday

The three-year plan negotiated between the government and creditors dictates that Portugal must reduce its deficit to 5.9 percent of gross domestic product this year, 4.5 percent in 2012 and 3 percent in 2013, the Times said. Commerzbank economist Ralph Solveen said the package aligned with recent estimates made by senior European Union officials of what Portugal would require.

"The size of the package signals the determination of the EU authorities to ring-fence problems in the periphery, especially given the elevated market concerns about Greece and subsequent contagion risks that could arise from that," Barclays Capital said Wednesday.

Terms of the deal are expected to be officially confirmed Thursday.

Socrates resigned in March after Parliament failed to endorse his additional austerity measures. Portugal is to hold a general election June 5.

Source: UPI