Portugal is third EU domino to fall

PORTUGAL caved in to the unbearable strain on its finances last night as finance minister Fernando Teixeira dos Santos (pictured) admitted that it has asked the EU for a rescue.

With the government €10bn (£8.8bn) short of the cash needed to see it through to the end of elections in June, interim Prime Minister Jose Socrates said that he had bowed to the “inevitable” in seeking a bailout. “I tried everything, but in conscience we have reached a moment when not taking this decision would imply risks that the country should not take,” he told the nation.

A sale of €1bn (£878m) of Lisbon’s debt yesterday morning saw yields reach an eye-watering 5.1 per cent for six-month bonds, a price that Portugal’s government admitted was unsustainable.

The rescue is likely to cost between €70bn and €90bn – similar to Ireland’s €85bn bailout – with the UK liable for 13 per cent of the costs.

The European Commission confirmed that it had been approached by Portugal “to ask for the activation of the financial support mechanisms”. The IMF said it had not yet been approached but was ready to help.

However, Socrates is only interim Prime Minister since his resignation after failing to get an austerity budget through parliament last month, and lacks the legal power to negotiate a bailout.

“The EU has seen what happened in Ireland with the popular legitimacy of the package when the government that negotiated it didn’t implement it,” says Kevin Dunning of the Economist Intelligence Unit.

Instead, Lisbon could ask for a bridge loan of €10-€15bn, leaving a new government to negotiate a formal rescue in June. Such a move will prove extremely unpopular in Germany, the Eurozone’s paymaster, where it would be seen as an unconditional gift rather than a bailout with strict terms.

Eyes will now turn to Spain, which has so far managed to “decouple” from other peripheral euro states. But many are sceptical. Newedge’s Bill Blain said: “I just can’t accept Spain is not a problem waiting to happen. Banks and property, banks and property just won’t stop ringing in my ears.”