EU diplomat: Portugal to get next slice of aid

DON MELVIN and SARAH DiLORENZO, Associated Press

LUXEMBOURG -- Portugal's international creditors have agreed to give the country the next slice of its rescue loans, worth (EURO)4.3 billion ($5.57 billion), according to a European Union diplomat.

The decision, made at a meeting of the 17 finance ministers of the countries that use the euro in Luxembourg Monday, was widely expected _ even though Portugal has said it would miss the targets laid out in exchange for the (EURO)78 billion bailout. Already, the foreign lenders have allowed them to reduce their deficit to 5 percent of its gross domestic product this year, rather than 4.5 percent.

The diplomat spoke on condition of anonymity because the discussions were closed.

Earlier Monday, as ministers were gathering for the meeting, Olli Rehn, the EU's financial and monetary affairs commissioner, said he was "less pessimistic" about the future of the euro than he was earlier this year _ but warned that the region was still a long way to go before the crisis over too much debt is solved.

Rehn said the organization's ability to react to the eurozone's financial crisis has much improved compared with two years ago when the crisis began.

He also welcomed the official launch Monday of Europe's new (EURO)500 billion ($647.9 billion) permanent bailout fund, the European Stability Mechanism.

"We have enough challenges in Europe," Rehn said as he entered a meeting of finance ministers from the eurozone. He added that while nobody was in a " party mood," he was "less pessimistic for the moment of the future prospects of the eurozone than, for instance, in the spring."

In recent months, the EU has acquired significant new powers designed to help it resolve the current crisis and prevent new ones. These include the power to closely monitor national budgets and, where needed, demand changes in them. Also in the works is a central banking supervisor.

The new ESM is designed to reassure investors that the EU is better equipped to contain whatever crises erupt in the eurozone.

"Today is a good day for Europe," said Jean-Claude Juncker, the prime minister of Luxembourg who is also chairman of the ESM's board of governors.

The new fund will eventually have (EURO)500 billion at its disposal that it will use to buy up the bonds of countries whose borrowing costs are becoming unmanageable and also lend money to them if that's not enough. It will also lend money to countries that need to prop up failing banks, including handling Spain's bank bailout. It is expected that the fund will eventually be able to lend money directly to banks.

The ESM will eventually replace a temporary bailout fund, known as the EFSF, but the two will overlap for the time being while the EFSF continues to handle the bailouts of Greece, Ireland and Portugal.