European Central Bank 'encouraged' Portugal to seek aid

People using ATMs in Lisbon Portugal is braced for austerity measures following the EU bail-out

European Central Bank (ECB) President Jean-Claude Trichet has said that it encouraged crisis-hit Portuguese authorities to seek financial aid.

He was speaking after the ECB raised rates to 1.25%, which may add to the problems of debt-ridden countries.

Portugal's troubles are also expected to be discussed at a two-day meeting of EU finance ministers in Budapest.

Portugal's caretaker Prime Minister Jose Socrates said on Wednesday he would ask for financial assistance.

"We have encouraged the Portuguese authorities to ask for support and that was commanded by the situation after what has happened previously in Portugal," said ECB President Jean-Claude Trichet.

A European Commission spokesman said that a formal request for aid had not yet been received, but that the EU would be negotiating a deal with Portuguese authorities even though there is only a caretaker government in place at the moment.

"The Commission stands ready to send a mission to Lisbon along with European Central Bank staff as soon as we are asked to do so," said spokesman Amadeu Altafaj.

The finance ministers' meeting will begin on Friday.

'No contagion risk'

Gavin Hewitt's Europe

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The heart of the problem is that Europe has become, in part, a low-growth area”

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Portugal follows Greece and the Irish Republic in seeking a bail-out.

However, Spain was quick to say it would not be following these countries in seeking assistance.

Analysts have expressed concerns about Spain as it has EU's highest unemployment rate and is struggling to deal with a banking crisis and the collapse of its property boom.

But Spain's Economy Minister Elena Salgado said that financial markets were perfectly capable of distinguishing between the situations in Portugal and Spain.

In an interview on the national radio station SER, she said that the risk of contagion was "absolutely ruled out", and added it was clear that Spain's economy was much more competitive than Portugal's.

French Finance Minister Christine Lagarde later supported this view.

"I don't think that there is any risk of contagion to Spain at all because Spain has led a number of reforms, in particular to its banking system, and is much more solid as an economy given the measures that have been taken, and the markets know that," she told France 3 television.

Ms Lagarde also said she was relieved at Portugal's request for aid.

In Portugal, Mr Socrates had put off a bail-out request for as long as he could, having stepped down as prime minister after failing to pass austerity measures.

"I always said asking for foreign aid would be the final way to go but we have reached the moment," he said.

"Above all, it's in the national interest."

Borrowing costs

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It is obviously a national humiliation for Portugal that it has had to request a rescue from its eurozone partners. But this is one of those cases where the struggling debtor, Portugal, can be seen to be as powerful as the creditors, which include banks and the European Central Bank.”

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European Commission President Jose Manuel Barroso said in a statement that Portugal's request would be processed "in the swiftest possible manner, according to the rules applicable".

He also reaffirmed his "confidence in Portugal's capacity to overcome the present difficulties, with the solidarity of its partners".

Mr Socrates did not say how much aid Portugal would ask for. Negotiations will now be under way and the BBC's business editor Robert Peston said rescue loans could amount to as much as 80bn euros ($115bn; £70bn).

That amount would be equivalent to nearly half of the country's entire economic output in 2010.

On Wednesday, the government raised about 1bn euros after tapping the financial markets in order to repay loans, but will have to pay a higher interest rate to lenders.

Portugal's cost of borrowing has risen sharply since the minority socialist government resigned last month after its proposed tougher austerity measures were defeated in parliament.

Since then several rating agencies have downgraded the country's debt.

Elections are due to take place on 5 June.

Low growth

Portugal's problems have been different from those of the other countries that have needed bailing out.

Low economic growth and high wages have meant that the country has struggled to raise enough money through taxation to pay for government spending.

When the banking crisis came, it found itself dealing with the same rising costs of debt that other countries had to deal with, and has finally had to concede that it cannot raise the money it needs through financial markets.

The UK has said that it will not be extending the sort of bilateral loans it offered to the Irish Republic, because it does not have such a close relationship.

But the UK is committed to contribute to one of the EU's temporary bail-out funds as well as the International Monetary Fund's scheme, either of which could be used to assist Portugal.

It will not be clear how much the UK will have to contribute until the details of the bail-out have been agreed.

UK Chancellor of the Exchequer George Osborne, who will face criticism if the UK ends up supporting Portugal, said that Portugal's problems showed why it was so important for the UK to cut its own budget deficit.

"If you hear the stories about the cuts and still wonder why our country needs to take these difficult decisions, then look at what is happening around us," he said.

"First Greece, then Ireland, today Portugal."

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