NEWS 3

Lisbon, Portugal (FT.COM) -- More than 15 per cent of Portugal's €78bn financial rescue package will be used to shore up the country's banks, which will be required to increase their capital substantially over the next 18 months, according to sources close to the negotiations.

The sources said a total of €12bn had been earmarked for the financial sector under the terms of the bail-out agreement, which José Sócrates, Portugal's caretaker prime minister, announced on Tuesday night.

Portuguese bond yield fell on Wednesday on news of the bail-out, but market relief was limited with key details still to be confirmed

Portugal became the third eurozone country after Greece and Ireland to agree on a rescue package after almost a month of negotiations between the Lisbon government and officials from the European Commission, the European Central Bank and the International Monetary Fund.

Under the programme, banks will be required to increase their core tier 1 capital ratios -- a measure of financial strength -- to 9 per cent this year and 10 per cent in 2012, according to the sources. Portugal's central bank recently stipulated a target of 8 per cent for the end of 2011.

Portuguese banks, virtually frozen out of capital markets because of successive downgrades of Portugal's sovereign debt ratings, have become highly dependent on ECB funding over the past year.

The bail-out plan seeks to ensure they will have the financial strength and liquidity to finance the Portuguese economy, which is forecast to contract by 2 per cent this year.

Announcing the bail-out agreement in a televised address, Mr Sócrates said the three-year programme would be more lenient than rescue packages agreed by Greece and Ireland.

Portugal has been given until 2013 to cut is budget deficit to 3 per cent, down from 9.1 per cent last year. Lisbon had previously planned to reached the 3 per cent target in 2012.

Ralph Solveen, an analyst with Commerzbank, said the conditions attached to the bail-out package were "less ambitious than many had probably expected".

The relaxation in Portugal's deficit targets "suggests that the terms for Greece and Ireland may also be loosened", he said in a report on Wednesday.

Mr Sócrates, who is campaigning for re-election in a general election on June 5, stressed that the package would not involve any cuts in public sector wages or the minimum national wage, nor any dismissals of state workers.

However, details of the agreement emerging on Wednesday from sources familiar with the talks and in Portuguese media reports, included a special tax on pensions above €1,500 a month and a freeze in public sector pay and pensions until 2013.

Unemployment benefits will not be paid for longer than 18 months (compared with three years currently) and will not exceed a maximum of €1,048 a month (down from €1,258). Big state infrastructure projects and public-private partnerships (PPPs) are to be suspended while their viability is reassessed.

More than 20 existing PPPs are expected to be re-evaluated with technical assistance from the IMF and EU. Municipal property taxes are to be increased and lower limits set on tax-deductible expenses.

Regional and local authorities will be required to reduce their staff. A privatisation package will seek to raise about €5.3bn during the next three years.

Officials from Portugal's two main opposition parties were due to meet with the troika of Commission, ECB and IMF officials later on Wednesday before final details of the rescue package were announced.
COMMENT good for portugal goverment and peaople