PORTUGAL'S BAILOUT:Negotiations will begin in earnest once the EU-IMF 'troika' has examined the books

PORTUGAL’S REQUEST for fiscal aid takes the country’s would-be sponsors onto new ground as the caretaker Portuguese government’s powers are limited pending an election in June. There is some confidence that an EU-IMF bailout deal can be done within weeks, but little clarity as to how precisely that can be achieved.

The reluctant capitulation of acting prime minister José Socrates reflects the increasingly distressed state of his administration’s finances after Portuguese banks made clear they no longer trusted its debt.

This added to anxiety over a big bond redemption due soon after polling day.

External aid will be required before the election, increasing the stakes hugely and raising questions as to the legitimacy of any pact struck with a caretaker administration. Numerous technical and legal issues arise here and there is some frustration in other countries that this situation has arisen at all.

“There is reason to point sharp criticism against Portugal,” said Swedish finance minister Anders Borg. Sweden is not itself in the euro zone, but Borg maintained Portugal has put the world in a “tricky” place. “This decision should have come in November or December.”

That is disputed in Lisbon, although it is clear that the omens for Portugal had been dire for many months.

Socrates insisted all along that there was no need for any rescue. However, his high-risk threat to quit if the previously pliant opposition voted down a new austerity plan backfired in the most spectacular fashion. The plan fell, he resigned, elections were called and what remained of market support evaporated.

With the pressure on Portugal so intense for so long, the debacle reflects badly on Socrates but also on his main rival Pedro Passos Choelho, leader of the opposition Social Democrats.

By their own actions, they hastened a humiliating international intervention in their country’s affairs.

So what happens next? Acting finance minister Fernando Teixeira dos Santos will brief his counterparts at a scheduled informal meeting near Budapest today, but the real bargaining won’t begin until the EU-IMF “troika” examines the books in Lisbon.

This was the way when Dublin sought aid in November, as officials from the European Commission, the European Central Bank and the IMF carried out their own assessment of the State’s requirement for cash. An imminent troika mission to Portugal will be the first of many.

There are two competing theories as to what happens after that. In the first, the troika would agree a “phased” programme with Portugal, which would provide enough money to get through the June bond redemption and meet other pressing obligations.

The Socrates administration would have to agree to immediately implement stringent policy conditions, even as it campaigned in the election, but other long-term commitments would be subject to final agreement with the eventual election winner. To ensure the immediate conditions are met after the poll, each of the main Portuguese parties would have to agree to honour them if they enter government.

This has obvious attractions for Portuguese leaders as it holds out the prospect that the election victor would not be cut out of the eventual deal. Still, the country is no longer in charge of its own destiny and its sponsors would prefer to conclude a fully-fledged rescue programme before the election with no scope for backtracking.

The key to that is opposition involvement in the talks, which would be highly sensitive given the election campaign and the inevitable policy intrusion that comes with a years-long rescue programme. On the other side, however, it is clear that the country’s partners can withhold support until such time as all parties sign up irrevocably to a pact. All signs suggest they will have their way.

Important here is German reluctance to consider anything other than a full-scale programme. Bilateral loans and bridging financing are non-runners in Berlin, leaving Portuguese leaders with exceptionally difficult decisions to take in the coming weeks. After the fall, the reckoning.

Nothing is easy in the bailout zone.