Euro zone to back Portugal aid, IMF deputy to attend

BRUSSELS/ATHENS (Reuters) - Euro zone finance ministers are expected to approve the EU/IMF bailout of Portugal at a meeting on Monday and will discuss further steps Greece must take to meet deficit-reduction targets.

The meeting, overshadowed by the arrest of International Monetary Fund chief Dominique Strauss-Kahn on sexual assault charges, will also assess demands by Finland that private sector investors carry more of the risk in Portugal's aid package, and that the country begin privatizations to raise capital.

Strauss-Kahn, who has been at the heart of EU/IMF negotiations over bailouts for Greece, Portugal and Ireland, was supposed to attend the meeting, but Deputy Managing Director Nemat Shafik will be there instead, the organization said.

His absence from the top rank of IMF decision-making is not expected to affect any of the bailouts in the short term, but could have an impact in the longer term if it leads to a change in the nature and style of the IMF's involvement.

Strauss-Kahn, who has been at the IMF for nearly four years, is seen as having made the organization less doctrinaire when it comes to providing assistance to struggling sovereign countries, leading it to take a less strict, more pro-growth stance.

The European Commission, which negotiated the Portuguese bailout and earlier assistance packages for Greece and Ireland alongside the IMF, dismissed suggestions Strauss-Kahn's arrest would have any impact on any of the programs.

"I would like to reassure public opinion, the markets and the press, there's absolutely no question: decisions which are under way will not be impacted and this will not have an impact on the programs being applied," Commission spokesman Amadeu Altafaj told reporters.

Ahead of the meeting, sources said EU and IMF inspectors would tell euro zone finance ministers they were not yet happy with Greece's proposed budget steps and that more talks were needed on fiscal and privatizations plans.

DIFFERENT TERMS FOR PORTUGAL?

Portugal's 78 billion euro bailout, finalized this month, will involve loans over three years to provide budget support, aid with reforms and help with recapitalizing its banks.

The plan needs to be approved unanimously by euro zone finance ministers. Finland's parliament set conditions for its approval on Friday, saying Lisbon had to ask private bondholders to maintain their exposure to Portuguese debt and that Lisbon should embark on a privatization program to raise funds.

If euro zone finance ministers agree to the Finnish demands, it will mark a change from the terms given to Ireland and Greece, which did not mention any need for private investors to maintain their exposure to the countries' debt.

"I believe the program fulfils all their conditions and their concerns," Portugal's finance minister, Fernando Teixeira dos Santos, told reporters as he arrived for the meeting.

"I am confident the program will raise no big issues in our discussions this afternoon."

Ministers are expected to agree that Portugal will pay an interest rate of between 5.5 and 6.0 percent for its loans.

That is in line with the borrowing cost set by the initial euro zone agreement on emergency funding through the European Financial Stability Facility (EFSF), rather than a more favorable EFSF lending rate EU leaders suggested in March.

Euro zone leaders lowered Greek loan rates, originally about 5.2 percent, to 4.2 percent in March. But the 5.8 percent on loans to Ireland was not cut, because of a dispute over its company tax rate, which France and Germany see as too low.

Ministers, including the Irish finance minister, said there would be no movement on Ireland's loans on Monday.

Despite its lower borrowing costs, Greece is pushing for an extension of the maturities on its loans and possibly an even lower interest rate, because it is struggling to finance itself, with total debts now at 150 percent of GDP.

RESTRUCTURING?

Many analysts expect Greece to have to restructure its debts at some point, but the European Commission, European Central Bank and others have repeatedly ruled out the possibility.

"Debt restructuring is not in the cards for Greece," the Commission's Altafaj said on Monday, although he later did not rule out a "reprofiling" of Greece's debt.

Some analysts have described "reprofiling" as akin to rescheduling, with the value of the debt not being marked down but the time for repayment being extended, thus changing the "profile" of the yield curve and giving the debtor more time to repay.

"Reprofiling is one concept, debt restructuring is a different concept," Altafaj said.

"It doesn't involve necessarily even the same players and doesn't have the same consequences," he said, adding that restructuring Greek debt would be devastating for the country.

Dutch Finance Minister Jan Kees De Jager said finance ministers discussed all sorts of issues, including restructuring, privately, but would not do so publicly.

A euro zone source involved in the preparations for the ministers' meeting told Reuters additional Greek financing needs in 2012 and 2013 would be discussed.

The source said countries in the single currency area could come up with additional funding for Greece only if Athens met the fiscal consolidation and reform targets to which it is already committed, and which would require new steps.