One way, Jose

Portugal: So there’s a deal, but what’s the deal? Jose Socrates, the Portuguese caretaker prime minister, has jumped the gun by announcing a bailout of his cash-strapped country by the euro zone and the International Monetary Fund, which he says will total some 78 billion euros.

Important details are still lacking — including the interest rates Portugal will have to pay for the loans. In addition, the agreement of its key participants — Portugal’s political parties and euro zone member states — is yet to come. The Iberian state is only half way to a deal.

The outgoing prime minister told his countrymen that Portugal’s problems weren’t as severe as those in Ireland or Greece — the two countries that had to be rescued by similar EU/IMF bailouts last year. But it’s hard to see what justifies this relaxed view.

Quite the contrary, Portugal, which has lagged the rest of Europe since the euro’s creation in 1999, must undergo painful reforms if it is to boost competitiveness and grow its economy.

In this respect, the list of things that Socrates said would not be required - like raising the retirement age or restricting public pensions and wages - is a worrying sign, even if the words he used were chosen for their political acceptability.

That said, the bailout should provide Portugal a large enough cover to implement the necessary reforms.

According to Reuters’ reports, 12 billion euros out of the 78 billion is to be earmarked to recapitalise the country's banks, with the aim of helping them up their core Tier 1 capital ratio to 9 per cent by the year-end, and 10 per cent in 2012.

This is more than markets generally expected. The rest of the money, two-thirds of which will be funnelled through the European Financial Stability Facility with the rest coming from the IMF, should largely cover Portugal’s funding needs over the next three years.

Sensibly, Lisbon will be given another year, until 2013, to shrink its budget deficit to 3 per cent of GDP from more than 9 per cent last year. This is not leniency, but realism. The impact of the deficit reduction plan on growth will adversely impact the government’s revenue.

Euro zone finance ministers, who will agree in mid-May on the interest rates to charge Portugal, must ensure that the cure, however painful, doesn’t kill the patient.