Image: A trader looks at screens at a bank market room in Lisbon
RAFAEL MARCHANTE  /  Reuters
A trader looks at screens at a bank market room in Lisbon Thursday. Jean-Claude Trichet, the president of the European Central Bank (ECB), said the central bank encouraged struggling Portugal to seek financial aid to ease its financial woes.
msnbc.com news services
updated 4/7/2011 12:56:26 PM ET 2011-04-07T16:56:26

Jean-Claude Trichet, the president of the European Central Bank (ECB), said Thursday the central bank encouraged struggling Portugal to seek aid to ease its financial woes.

Trichet was speaking after the ECB said it is raising its main interest rate by a quarter of a percentage point to fight inflation, despite the debt problems afflicting Portugal, and also Greece and Ireland.

“We have encouraged the Portuguese authorities to ask for support,” Trichet said, adding that the ECB will help the nation to implement any aid plan it puts in place.

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Portugal's woes are expected to be discussed when EU finance ministers meet in Budapest later Thursday.

The ECB's key refinancing rate is going up to 1.25 percent from a record low of 1 percent. The increase in the ECB's benchmark refinancing rate, its first since July 2008, marks a gentle exit from the central bank's policy response to the global financial crisis. It had held the refi rate at a record low 1.0 percent since May 2009.

Trichet said Europe faces continuing inflation risks despite the economic difficulties in Portugal, Greece and Ireland. Inflation risks "remain on the upside" and the ECB will "monitor very closely" future price developments, he added.

The ECB rate decision came less than 24 hours after Portugal announced it was seeking European Union support, a decision long expected by financial markets.

Portugal will formalize its request for a rescue package that could reach 85 billion euros ($122 billion) on Thursday and a deal could be reached before a June 5 election, officials said.

Lisbon's caretaker government decided on Wednesday to seek foreign aid, becoming the third euro zone country to do so after Greece and Ireland.

"Portugal will today formalize its request with the European Commission," Cabinet Minister Pedro Silva Pereira told reporters after a cabinet meeting.

The Socialist government resigned on March 23 after parliament rejected its austerity plan, sparking a crisis that pushed Portuguese borrowing rates sharply higher and led to multiple downgrades of the country's creditworthiness.

A euro zone source played down concerns that Prime Minister Jose Socrates' government might not have the necessary powers to negotiate a bailout program, saying it probably would do so in close coordination with the main opposition party.

The source said that the main elements of the program would be in line with those previously announced by the government and that budget targets would likely be little changed.

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"The Portuguese program will be agreed before the elections on June 5," another senior European Union source said, adding that the first loans were very likely to be made to Portugal by then.

Silva Pereira would not comment on the likely size of the aid but Finland's government said it could amount to 75-85 billion euros ($107-122 billion).

Portuguese banks took the unprecedented step on Monday of warning the government that they might stop buying its debt — a move which probably tipped Socrates into seeking help.

Publico daily said "pressure from banks was decisive for the government's request for aid."

German Finance Minister Wolfgang Schaeuble said the aid could only be granted in the framework of a reform program, which would take two to three weeks to put together, adding that the issue would be discussed at a Euro Group meeting in Hungary on Friday.

The Associated Press and Reuters contributed to this report.

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