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Debt-ridden Portugal faces uncertainty after PM quits

Published on 24/03/2011

Portugal plummeted into fresh crisis Thursday after the prime minister quit following a showdown with parliament over his new austerity plan, increasing the likelihood Lisbon will seek a financial bailout.

Prime Minister Jose Socrates tendered his resignation late Wednesday, saying he could not govern without support after all five opposition parties voted against his minority government’s latest spending cuts and tax hikes.

The austerity plan — the government’s fourth in a year — was aimed at avoiding the need for an EU-IMF bailout to help Lisbon meet debt repayment obligations, a package similar to those granted fellow eurozone members Greece and Ireland last year.

“This crisis will have very serious consequences in terms of the confidence Portugal needs to enjoy with institutions and financial markets,” Socrates said after presenting his resignation to President Anibal Cavaco Silva.

The events in Portugal threaten to derail a two-day European Union summit that gets underway Thursday in Brussels that had been expected to finalise the bloc’s response to a year-long eurozone debt crisis.

German Chancellor Angela Merkel said Thursday she regretted that parliament had rejected Socrates’ austerity plan, describing it as “correct and courageous.”

“Now what?” said the headline on the front page of business daily Diario Economico, summing up the national mood.

The Portuguese president will hold meetings with all political parties on Friday and the government would retain full powers at least until then, the president’s office said in a statement.

That leaves Socrates, in office since 2005, and his Socialist government in place with full powers for the duration of the EU summit although as an outgoing leader his authority is severely damaged.

The president can now invite parties with representation in parliament to form a coalition government or, in the more likely scenario, he can dissolve parliament and call snap elections.

If he opts fresh elections, the vote must be held at least 55 days after they are called.

The Socialists would be at the helm of a caretaker government with limited powers for weeks under this scenario.

The prospect of a prolonged period of political uncertainty in one of the 17-nation eurozone’s smallest and weakest economies caused the euro to drop against the dollar and led Portugal’s already high borrowing costs to rise further.

“It is hardly unlikely that Portugal will manage without external support up to the new elections,” said Christoph Weil, senior economist at Commerzbank in Frankfurt.

He estimates a bailout for Portugal would total roughly 57 billion euros. Other analysts have put the size at between 50 and 100 billion euros.

Socrates, who once famously described himself as a “ferocious animal” in politics, has said he would stand again for election.

The main opposition centre-right PSD has a lead over the Socialist Party in opinion polls but is not sure of winning an absolute majority.

Manuel Villaverde Cabral, a sociologist at Lisbon University, said the PSD would likely seek to govern with the support of the tiny conservative CDS party.

But he said the re-election of the Socialists could not be ruled out “because the ferocious animal is not a bad candidate.”

Businessman Sebastiao Nogueira said the political crisis came at “the worst moment”.

“What is going to happen in the short-term is disastrous, it means the arrival of the IMF and people are going to suffer more than they have up until now,” the 58-year-old said as he sat at a cafe terrace in Lisbon.