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Portugal faces tough terms to get 80 billion-euro loan

European partners demand greater austerity, privatizations, labor reform

Portugal's European partners will insist on tougher deficit-reduction measures than those rejected by parliament last month in exchange for emergency funding of about 80 billion euros, which could be agreed by the middle of next month.

The head of the Eurogroup, Luxembourg Prime Minister Jean-Claude Juncker, said Friday the austerity measures presented by the Portuguese government on March 11, which aimed to trim the public deficit by 4.5 percentage points over three years, were a "starting point."

Those measures were rejected by the Portuguese parliament on March 23, sparking the resignation of Prime Minister José Sócrates and the announcement of general elections to be held on June 5.

Juncker said apart from extensive fiscal consolidation, the conditions attached to the loan would also include an ambitious privatization program and deep structural reforms, mainly in the labor market.

"The package must be really strict because otherwise it does not make any sense to guarantee anybody's loan," Finnish Finance Minister Hyrki Katainen told reporters at a Eurogroup meeting on Friday in Godollo, Hungary. "The package must be harder and more comprehensive than the one that parliament voted against."

Tough political deal

Negotiations will be complicated by the fact that they need to be conducted not only with the caretaker government but also the main opposition parties.

"We need a commitment from the country, not only a commitment from the government," Portuguese Finance Minister Fernando Teixeira dos Santos said. "I think we have to be committed to reaching an agreement as soon as possible," he added. "That will be demanding, given the political situation in Portugal."

The government faces heavy debt redemptions later this month and in June totaling about 9 billion euros. The European commissioner for economic affairs, Finland's Olli Rehn, told reporters after the Eurogroup meeting that he is confident Portugal can cover its financing needs in April and May, but said June would be more "challenging."

The European Commission, the International Monetary Fund and the European Central Bank are due shortly to send a mission to Lisbon with the aim of arriving at an agreement before the meeting of European Union finance and economy ministers in mid-May.

"The preparations will start immediately to reach a cross-party agreement ensuring that an adjustment program can be adopted by mid-May and implemented swiftly after the formation of a new government," European finance ministers said in a statement.

Portugal is the third euro-zone country to succumb to the debt crisis in the single-currency bloc, but Brussels hopes it will be the last, daunted by the idea of having to find a rescue package for a country as big as Spain.

Spain has managed to decouple itself from the problems of Portugal, Greece and Ireland as evidenced by a successful government bond tender on Thursday, just hours after Lisbon announced it would seek a rescue package. Finance Minister Elena Salgado on Friday reiterated that the idea of Spain needing to be bailed out was "completely out of the question."

Rehn said part of the estimated 80 billion euroswould be set aside for Portuguese banks, which have seen their access to the wholesale markets blocked by the government's debt crisis and which are reliant on ECB funding.