Portugal avoided default on Friday as it scraped together 4.2 billion euros ($6.1 billion) for a bond redemption, but further depleted its meager cash reserves as it desperately awaits a promised bailout.
Portugal is eight weeks away from possible bankruptcy. Officials admit they won't have enough money to settle a 7 billion euro debt falling due mid-June and have asked for financial help amid a cash crunch that is threatening the provision of basic services.
The ailing country is weathering unsustainable costs on loans to finance its economy, with its 10-year bond yield reaching 8.9 percent Friday as markets shied away from investing their money in a country viewed as a risky bet.
Portugal's European partners and the International Monetary Fund last week agreed to provide aid which could amount to 80 billion euros ($115 billion).
But negotiations on the terms of the loan, especially what interest rates Portugal will be obliged to pay on it, are likely to take weeks.
Portugal repaid a loan maturing on 2005 bonds as expected Friday, an official from the Finance Ministry said on condition of anonymity, in line with government policy.
"I think this will be the last debt paid out of our own pocket," said Filipe Silva, debt manager at financial group Banco Carregosa. "The next redemption .. will probably be paid with foreign help."
International focus is now on the bailout negotiations. Officials from the IMF, the European Central Bank and the European Commission began examining Portugal's books earlier this week to determine exactly how much money it needs.
Talks on what strings will be attached to any bailout, including the interest rate, new austerity measures and changes to the country's economic policies, start next week.
But the negotiations coincide with early campaigning for the election of a new government — an overlap that could complicate efforts to reach a deal swiftly.
Creditors want cast-iron assurances they'll get their money back, meaning negotiators have to get the blessing for any agreement from political parties which could emerge victorious from the June 5 ballot.
The parties, however, are in confrontational mood as they blame each other for the country's worst financial crisis in almost 30 years and have not yet been clear about what loan conditions they might find palatable.
European leaders are particularly keen to avoid pushing Portugal into restructuring its debt, which would change the dates on which creditors are repaid and generate fresh market doubts about the 17-nation eurozone's financial future.
At the same time, political leaders in wealthy countries that will have to put up much of the money — especially Germany and Finland — are demanding a tough approach to Portugal, one of the eurozone's poorest nations, in order to placate their taxpayers.
Alvaro Almeida, an economist at Porto University in northern Portugal, said there's a lot at stake for both sides as failure to clinch a deal could have "extremely grave consequences" for Portugal and the wider eurozone.
Banks in Spain, another debt-stressed country which over the past year has suffered from investor jitters, are heavily exposed to Portuguese debt. Italy and Belgium are also saddled with high debt.
"For Portugal, the consequence of no (bailout) deal would ... probably be some kind of default," Almeida said. "For Europe, default by a eurozone member would have grave consequences for Spanish banks, pushing Spain towards default ... creating a domino effect and probably ending the euro as we know it."
Ireland is arguing for a lower interest rate on the aid it accepted last year, after Greece was rewarded with a modest reduction to ease a repayment burden that was crippling essential growth. Both countries remain in recession.
Almeida said Portugal will likely hold out for an interest rate on the bailout loans of just over 4 percent.
European finance ministers are aiming to approve a bailout agreement on May 16.
Portugal's outgoing Socialist government spent the past year trying to outrun the gathering financial storm. It introduced a series of pay cuts and tax hikes until opposition parties said it was going too far. The government quit last month after Parliament rejected its plans.
The main opposition Social Democratic Party, which has a clear lead in opinion polls, supports fiscal retrenchement but is against imposing further hardships on the poorest members of society.
Portugal's prospects of escaping its debt woes are made harder by a recession which the IMF predicts will continue through 2012.
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