Portugal's 78bn euro bail-out is formally approved

EU commissioner Olli Rehn said loan was "an important step"

Eurozone financial leaders have unanimously approved a 78bn euro (£68bn; $110bn) bail-out for Portugal.

The group, which has been meeting in Brussels, said the loan was to "safeguard financial stability in the euro area and the EU as a whole".

The meeting has been overshadowed by the arrest of IMF boss Dominique Strauss-Kahn in New York, on charges of the sexual assault of a hotel maid.

The IMF has also approved 1.58bn euros in new assistance to Ireland.

Portugal's loan will be split three ways between the European Financial Stabilisation Mechanism (EFSM), the European Financial Stability Facility (EFSF), and the IMF. Each will contribute 26bn euros.

In return for the deal private bondholders have been instructed to maintain their exposure to Portuguese debt, rather than sell it off.

Portugal, which formally requested the loan last month, has also agreed to reform its health care system and pursue an "ambitious privatisation programme".

Meanwhile, the group of eurozone leaders also formally recommended Italy's Mario Draghi, to replace Jean-Claude Trichet as the next president of the European Central Bank when he steps down in October.

The appointment of Mr Draghi, who is the current governor of the Italian central bank, is expected to be given the final green light by European institutions in July.

Greece

The eurozone finance ministers also discussed the situation in Greece, and whether the country would need additional help to deal with its debts.

Start Quote

His departure would prevent him brokering a deal between France and Germany on how, and how often, to bail out Greece and other countries in crisis ”

End Quote Stephanie Flanders BBC Economics editor

The head of the eurozone group Jean-Claude Juncker said a "kind of reprofiling" of Greek debt had not been ruled out, but he eliminated the possibility of a "large restructuring".

"Greece must still step up the implementation of its fiscal and structural reforms and start implementing the ambitious privatisation programme which is worth about 50 billion euros and do so without any further delay," said Mr Juncker.

"This is very important part of reducing the debt burden of Greece as the 50 billion euros is equivalent to about 20 percent of the GDP of Greece."

He added that the "Greek chapter" will be "definitively" concluded at a further meeting in June.

'Significant role'

Analysts had been worried about Mr Strauss-Kahn's absence from the Monday evening meeting.

"The leadership vacuum at the IMF comes at a highly inopportune time for Europe, which is teetering on the brink of a full-blown debt crisis," said Eswar Prasad, a professor of international economics at Cornell University and a former IMF official.

Lucinda Creighton, the Irish Republic minister for Europe, told broadcaster RTE that Mr Strauss-Kahn was "somebody who has had a significant role in the events of recent months in relation to the Irish bail-out".

However, she added, "it is not unusual for the head of the IMF to be absent from a meeting like this and I don't think it'll really have any impact".

Some European leaders are unhappy at what they perceive as limited Greek efforts to raise money by selling government property.

Dutch Finance Minister Jan Kees de Jager said he was not convinced Greece should get more money at present from the EU and IMF.

"It has to perform a lot more actions: reforms, austerity packages, the privatisation programme should be definitely rolled out by Greece, and then we will make up our minds," he said.

Analysis

At a sensitive moment for the eurozone crisis, Dominique Strauss-Kahn will be badly missed.

He was intimately involved in the detail of the bail-outs for Greece, the Republic of Ireland and Portugal.

He personally handled many of the negotiations and micro-managed some of the terms and conditions.

As a former French finance minister, he personally knew most of the key leaders and officials managing the crisis.

He passionately believed in the survival of the euro and, under him, the IMF was fully committed to finding a way out of Europe's debt crisis.

Although his deputy John Lipsky was the case officer for the bail-outs, he is unlikely to be such an influential figure.

If and when Mr Strauss-Kahn is replaced, the leadership of the IMF may well not go to a European, and officials in Brussels are already anxious about this.

"But at the moment it seems that Greece is not on the right track - it should be first brought on the right track before any other decision is contemplated."

Debt-strapped Greece was bailed out a year ago by the EU and IMF to the tune of 110bn euros ($157bn; £93bn) euros.

Since then it has imposed a series of financial cuts and austerity measures to try to balance its books.

On Friday, EU Economic and Monetary Affairs Commissioner Olli Rehn said Greece must take additional steps to consolidate public finances because it was missing its deficit reduction targets.

The country has a 327bn-euro debt - nearly 150% of its output.

Germany provided a large chunk of the Greek bail-out cash and wants to see stringent conditions applied before backing any new aid.

European Central Bank governing council member Ewald Nowotny told German business daily Handelsblatt that Greece may be entitled to receive further loans.

"But you have to grant them under very strict conditions," he added.

Many analysts believe that Greece's financial troubles are so deep that a Greek default on its debts appears inevitable.

"The policy response [to the debt crisis] continues to be ad hoc, behind the curve," RBS chief European economist Jacques Cailloux said.

However, the European Central Bank appears determined to prevent any default as such a move could undermine the euro.

The euro fell to a seven-week low against the dollar and a two-month low against the yen before the meeting.

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