EU faces up to reality of Portugal bail-out as Chancellor says it shows need for cuts

Part of an estimated 70 billion rescue package will, as expected, be drawn from a temporary bail-out fund used for Ireland, requiring loan guarantees from all member states - even those not in the eurozone.

The arrangement was signed up to by former Chancellor Alastair Darling and fiercely opposed by his Tory shadow George Osborne.

Yesterday Mr Osborne, now Chancellor himself and in Budapest for crisis talks on Portugal, insisted that he had achieved three UK objectives in agreeing preliminary arrangements for another bail-out for a virtually bankrupt single-currency country.

"First, there has to be an IMF package for Portugal before any European money can be committed," he said.

"Second, I made it clear that, unlike the Irish case, the UK will not be making a bilateral loan to Portugal - British taxpayers' money will not be lent directly to Portugal.

"And third, we confirmed that while the previous government committed us to the temporary EU mechanism, this government has secured agreement that the UK will not be part of the permanent mechanism from 2013."

He also repeated his claim that the Portuguese crisis showed the value of tough austerity measures. "Discussing the bail-out of yet another country that had no credible plan to deal with its high budget deficit was another reminder that Britain's deficit- deniers are playing with fire."

Later he said Britain would only have to pay money to Portugal if the Portuguese defaulted on their EU loan repayments.

Shadow chancellor Ed Balls rejected Tory criticism of the Labour deal requiring a UK commitment to any bail-out until 2013. He added: "Most people would say this is a problem for the eurozone, which should be paying the vast bulk of the money here."