An undemocratic bailout

[Pollock]

Portugal needs international help to meet its debt obligations. But the insistence by the European Union and the International Monetary Fund that the caretaker Portuguese government commit to a long-term plan of fiscal austerity and economic reform in exchange for a rescue package is misguided.

The government of Prime Minister José Sócrates fell in March after the opposition rejected its austerity plan to address the economic crisis and is holding on to office only until special elections, which are scheduled for June 5. Not only would any reform package from the outgoing government lack legitimacy, it would lack credibility with investors, who would suspect the next government might not live up to what will inevitably be very painful terms. Rather than try to hammer out a definitive package, the European Union and the I.M.F. should give Portugal a bridge loan and wait to negotiate a deal until there is a new government in place. This would give Portuguese voters a chance to vote on proposals by each party to address the emergency.

In the meantime, Europe needs to rethink its all-pain-all-the-time approach to bailouts. The terms imposed on Greece and Ireland are stifling growth. On Wednesday, Germany acknowledged Greece may have to restructure its debts — rather than pay them in full.

Representatives from the European Union and the I.M.F. landed in Lisbon on Tuesday to negotiate a bailout plan expected to be worth $115 billion. The formula, by now, is predictable: deep budget cuts, cuts to public-sector wages and tax increases. They are also likely to demand that Portugal privatize state-run enterprises and reform labor laws to make it cheaper to hire and fire workers. The approach assumes sharp fiscal tightening will right Portugal’s finances, ignoring how a precipitous drop in government spending will cripple growth and Portugal’s ability to repay its debts. And it is unjust, demanding outsize, lasting sacrifices from the Portuguese people in order to repay Portugal’s creditors 100 cents on the euro.

There is time to get this right. Lisbon appears to have the funds it needs to meet a $7 billion debt-service payment coming due on Friday. While it does not have the money to meet a $10 billion payment on June 15, the European Union could provide short-term financing — with few strings attached — until a definitive deal could be negotiated with the new government. That is the best hope of coming up with a deal that Portugal’s new government and its voters can support — and one creditors will trust.

[Editorial NYT]