Bargaining in a void

Portugal: It took a while, but Portugal finally got it. The country's caretaker prime minister this week admitted he had no other choice than to formally request a bailout by the euro zone and International Monetary Fund. The country’s banks and global financial markets had sent unmistakable messages in recent days. The banks had warned they couldn’t buy Portuguese debt any longer, and urged the government to seek a financial lifeline. And on Wednesday markets demanded near — 6 per cent yields to lend to Portugal for one year — above the rates the country would be charged if it borrowed from the euro zone’s bailout facility over seven years. The real question now is what kind of conditions its partners can force on Portugal in exchange for help — and whether they can be confident the plan will muster a broad enough political support to bind the government that will come out of the June elections.

The best case scenario would be for international negotiators to secure broad, public cross-party agreement on a credible multi-year programme with the socialist and social democrat parties ahead of the election. International lenders could then start advancing cash. Portugal would get the money it needs in the first tranche of a ¤60-80 billion programme — with interest rates high enough to allow for some sweetening later, if the new government indeed accepts to implement the plan.

Such unity would be a blessing. New austerity measures suggested in February by the governing socialist party — including pension reforms and cutting subsidies for state-owned enterprises — were rejected by parliament, leading to the current political crisis. Opposition parties may have some difficulty endorsing the measures they rejected then — especially as it would deprive them of a juicy electoral argument, and would amount to admitting they plunged the country into chaos and a bailout just to gain power.

But if they don’t, the danger is that political uncertainty intensifies in the run up to June’s election, pushing up bond yields and triggering yet another round of rating downgrades. That could hurt Portuguese banks, which are still locked out of public debt markets. But nothing in their statutes says the euro zone and IMF can’t be politically subtle. They could agree to advance the bailout’s first tranche of cash so long as the major parties can agree on a minimum package. The terms could then be revised after the election by whichever party is left standing, if necessary. The euro zone cannot afford to not come to Portugal’s aid, so in the short term it must decide how low to stoop to secure stability. The right thing to do would be to accept nothing less than signed, public agreement between parties on a tough multi-year plan. If that isn’t possible, the euro zone will have to take what it can - and give what it must.